Whether you have debt you want to consolidate, a college education to pay for or a home needing a little TLC, cash-out refinancing can be a good option. It allows you to pay for the things you need when you need them.
If you’ve been in your home for a few years or your home’s value has increased considerably, you might be a good candidate for a cash-out refinance. A general rule of thumb for how much equity you need is at least 20%. You can calculate your equity by dividing what you owe on your home by its current value and subtracting it from 100%. For example, if you owe $300,000 and your home is worth $400,000, here’s how to calculate your equity:
$300,000 / $400,000 = .75 or 75%
100% – 75% = 25% equity
But refinancing isn’t the right decision for everyone. Check out this list of potential pros and cons of opting for a cash-out refinance option.
Benefits of Cashing In on a Cash-Out
Easier Qualifications
You’ve got a great head start on qualifying since you already own a home, have a payment history established and your home’s value is now more than you owe. That typically makes for a quicker and easier qualification.
Tax Deductions
Unlike credit card interest, mortgage interest is tax deductible*. A cash-out refinance could reduce your taxable income and land you a bigger refund during tax season.
Consolidate Debt
If you utilize your cash-out refinance to consolidate debt, you could save thousands of dollars in interest.
Improve Credit Score
Paying off your high-interest credit card can cause your credit utilization to go down considerably. Ultimately, this could give your credit score a boost.
Possible Drawbacks
Closing Costs
These are fees you will have to pay with a cash-out refinance. While there may be many cash benefits, make sure to include closing costs into your evaluation. Although you have to pay closing costs, it’s possible to roll closings costs into the refinance.
Longer Term
It’s typical with a cash-out refinance to reset your mortgage to a longer term than your original home loan, adding months and years to the length of your loan. That means you might end up extending your mortgage beyond the original term.
Higher Rates
While you might get the opportunity for a lower interest rate than your current mortgage, your cash-out refinance rate may be higher than a non-cash-out refinance at market rate.
New PMI
Borrowing more than 80% of your home’s value could require you to pay private mortgage insurance (PMI), potentially adding hundreds of dollars to your monthly payment.
Wondering if a cash-out is the right decision for you? Connect with one of our qualified loan experts to run your numbers and talk about your options.
* PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.
