By Joe Pujol
What does "cash-out refinance" mean?
It means you replace your existing mortgage with a new loan in an amount larger than what you currently owe. For example, on a house valued at $300,000 with $150,000 in equity, your cash-out refinance could be $200,000. The extra $50,000 can be used at your discretion. Some accrued home equity is what entitles you to receive a cash-out refinance.
A cash-out refinance differs from a traditional refinance because it's for more than the amount owed. Usually, a re-finance takes advantage of lower interest rates that save a homeowner money.
There are various advantages to a cash-out refinance:
A Lower Interest Rate
With a large pool of lenders available today, it's likely you can decrease the interest rate you're paying by using the cash-out option.
Paying Off Other Debt
You may be making payments on other loans with higher interest rates (credit cards, etc.) that you can eliminate, saving the difference.
Credit card interest is not tax-deductible. Mortgage interest is. So a cash-out refinance reduces your tax liability, meaning more cash in your pocket.
Improve Your Credit Score
By reducing the credit available to you that you're actually using, you may raise your credit score. So having a $1000.00 limit fully available, as opposed to "maxed out", helps your credit score.
As with anything financial, it's wise to remember the downside:
Make sure you factor in this expense when deciding if a cash-out is beneficial. Usually 3% to 6% of the loan amount, closing costs could negate other gains you would make.
Private Mortgage Insurance
Although not always required, a cash-out over a certain dollar amount could trigger this cost. Typically, PMI is 0.5% to 1% of the loan amount each year.
Risk Of Foreclosure
Obviously, repayment is necessary when your home is the collateral for any mortgage, including a cash-out refinance.
It's not difficult to have available credit again, overuse it, and find ourselves in financial quicksand.
What a cash-out refinance offers in the way of benefits, it demands back in the form of monetary self-discipline. The cash you take out of the process shouldn't be viewed as lottery winnings but as capital usable for your financial progress.
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