Cash-Outs Trade Money for Equity
Question: We are interested in doing a “cash out” refinance on our home. Are there any risks involved with this type of refinancing?
Answer: Cash-outs involve refinancing an existing mortgage and trading in home equity for cash. This option is especially popular when interest rates are down, because it allows homeowners to refinance at lower rates while gaining access to extra cash. Even better, their monthly mortgage payment usually remains the same or even goes down.
The benefits of cashing out include stretching the term of the loan to access more money at a lower rate, the ability to replace high-cost debt, and avoiding the need to cash in taxable investments.
Cashing out does involve some risks--including possibly renewing a mortgage for its full life and incurring a higher total interest cost for financing and reducing home equity. It can be detrimental if housing prices decline; homeowners who have little equity in a declining market could find that they owe more on their property than what it is worth. Also, homeowners must manage their finances carefully, using the cash-out funds to handle expenses and then keeping spending under control. Qualifying for a cash-out is also difficult. Because this type of borrowing eats into equity, it raises the risks to lenders, who, in turn, will want to carefully scrutinize applicants.
An alternative to cash-outs is the home equity line of credit, which allows a consumer to borrow on a revolving basis. Homeowners need only pay interest on the amount borrowed and will not have to reapply and pay service charges to gain access to more money. This option is most appropriate for borrowers whose cash-out will not reduce their mortgage payment and also for homeowners who want an extra source of cash for ongoing projects, rather than for a specific purpose.
For answers to your real estate questions, call Allison at 970-468-6800 or 1-800-262-8442