There are many pros and cons to refinancing. This is especially so in the case of the cash out refinance. With most refinances you adjust the terms of the loan to something that works better for your financial situation. You reduce the interest rate, you reduce the mortgage payment, you switched to a fixed mortgage or a combination of many other options. While these options are there on the cash out refinance mortgage as well, in reality you are simply increasing the debt you have in your home so you want to make sure you’re making a solid financial move. Here are a few things that you may want to take into consideration before you sign the papers.
The Cash Out Refinance Fees In a Nutshell
When you get a cash out refinance on your home you are essentially taking on a new loan, one that will be higher than your current low, but will preferably have a lower interest. Most homeowners do not stick with their original lender with a cash out refinance. Instead, they shop around until they find a lender that will give them the best deal on the refinance. This lender then writes up a new contract and creates a new refinance mortgage that is the amount of the old mortgage plus the increased amount for the cash that is pulled out. The lender then uses part of that mortgage to pay off the first mortgage and the rest is given to the homeowner.
Because a refinance mortgage is similar to taking out a new loan, you will be required to pay all of the fees that come with it. This means you’ll have to pay the appraisal, closing costs, the lawyer, the lender, the underwriter, and the list goes on. These expenses add up rapidly, so the typical refinance usually costs a few thousand dollars just to get the refinance completed. On a cash out refinance this doesn’t include the additional amount you’ll be paying on the mortgage because of the increased amount. All of these financial requirements don’t mean that the refinance isn’t going to be worth it. They are simply something you should be aware of so you can plan accordingly.
When Is This Refinance Mortgage a Good Idea?
The cash out refinance option is best for homeowners who know they can handle the increased mortgage amount. You will be taking on more debt for the home, increasing the risk of the investment and decreasing your assets. It’s essential that you be in a position with your finances where the amount of responsibility you are taking on won’t be a problem should your finances take a down turn.
Some homeowners like to cash out the equity and use it to pay off existing debt. This idea has its pros and cons. Consolidating debt and reducing interest rates can be a good move, but consolidating that debt into your home may not always be the best option. Keep in mind that when you refinance the home you are essentially locking yourself in to a new mortgage, quite often for another thirty year term. This means that you’ll be paying on that debt for the next thirty years. So if you want to consolidate your debt into one place, you may want to consider a low interest credit card, a debt consolidation program, or a strict financial budget prior to pulling out your equity. The equity can be a great place to consolidate, but this path should only be taken if all other options have been seriously considered, researched, and found to be lacking.
For many homeowners the equity in the home is an investment. When you get a chunk of money built up in your home, that money can look very enticing when it comes to other investments. This is probably one of the best ways to use your equity if you intend to get a cash out refinance. Taking the money you’ve built and rolling it into other investments, which will pay you dividends, can be a wise use of your finances. Increasing the investment portfolio is a strategy used by many financial experts to build wealth and increase financial stability. However, before charging down this path you’d be wise to consult a financial expert who can help you make investments that will pay off. Pulling out the equity and putting it into a high risk investment isn’t always the best plan.
There are many ways you can take advantage of the cash out refinance. All of them benefit you financially. So if you feel you will experience some of these benefits, by all means contact a loan officer, financial expert, and your lender to determine if this is the best step. However, if you want the equity for a bit of play money you may want to look at some other options.