Cash-Out Refinance Pros & Cons: Should I Cash-Out Refinance? (2024)

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The Pros and Cons of a Cash-Out Refinance

There are many benefits of cash out refinance, including the main benefit which is access to a large amount of cash.

A cash-out refinance is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest), and in the process, borrows more money than what is needed to pay off their current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing.

When is a cash out refinance a good idea? Getting a cash-out in a mortgage refinance can help homeowners obtain large, lump sum cash payments; however, refinancing may not be the best choice for obtaining cash due to closing costs.

Getting cash this way requires a new mortgage at a new interest rate so be sure that your refinance rate is lower than the rate you’re currently paying.

Homeowners who need cash can also consider using a Home Equity Line of Credit (HELOC) or a Home Equity Loan. These types of loans are secured by the equity in the home but do not require the mortgage to be refinanced.

In this article, we’ll discuss everything you need to know to decide whether a cash-out refinance is right for you.

Credit Union of Southern California (CU SoCal) provides mortgage refinancing Home Equity Lines of Credit (HELOCs) and Home Equity Loans.

Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgage options, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.

How much equity do you have in your home? Check out our home equity loan calculator.

Is it smart to do a cash-out refinance? Read on to learn more about cash-out refinance pros and cons.

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What Is A Cash-Out Refinance?

A cash-out refinance is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest), and in the process borrows, more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing.

Cash-out refinancing is a type of secured loan that uses the home as collateral. If the loan is not paid back in on-time monthly payments, the lender can put a lien on the property and foreclose.

Homeowners who want to take advantage of a new low interest rate and get cash are most likely to see the benefits of a cash out refinance.

These include paying less in monthly mortgage payments and having cash on hand to make home improvements, pay for college, a wedding, business expenses, and even pay off high interest credit card debt.


Cash-Out Refinance Requirements

Mortgage refinancing options can be found at credit unions, banks, and some online lenders. Credit unions tend to have the lowest fees and many will waive fees for Members with a current mortgage. While each lender will have unique requirements that borrowers must meet to do a cash-out refinance, here are some general requirements:

Credit Score. Lenders have different credit score requirements, but most will look for 660 or higher.

Debt-To-Income Ratio. This factor will vary based on the lender’s requirements, however, most lenders will accept a debt-to-income ratio between 35% and 50%.

Equity. Most lenders will allow homeowners to borrow up to 80% of their home equity. For example: Assume your house is valued at $500,000 and you owe $140,000 on your mortgage. If your loan provider offers you 80% of the loan to value ratio, 80% of $500,000 will be 400,000. Subtracting your mortgage amount will give you a value of $260,000. This is your equity amount, i.e., the most you can borrow.


Cash-Out Refinance Pros

There are unique benefits of a cash-out refinance, especially if you intend to use the money in the following ways:

Home Improvements And Renovations. One of the smartest uses for cash-out is to reinvest it in your home by making repairs and updates, such as a new roof and windows, or renovating the kitchen and bathrooms.

Consolidate Debt. Using the money to pay off high-interest credit card debt or student loans is a financially savvy use of cash-out, that can also save you hundreds of dollars a year.

Get A Lower Interest Rate. Because the cash-out is part of the new mortgage, there are no separate or unique rates charged on the funds. Therefore, the cash-out will be paid back at the same time as the regular monthly mortgage payments. If the borrower chooses an adjustable rate mortgage or a fixed rate mortgage, the interest paid will reflect the terms of the chosen loan type.

Increase Spending Power. Having access to cash lets homeowners benefit from their money, by paying off high interest debt or paying for their own or a child’s college tuition. Cash-out can be used to put yourself in a better financial position.

Tax Deduction. According to the IRS, “for you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.” In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Check with a tax professional for more details on whether your refinanced mortgage interest is tax deductible.

Improve Credit Score. Using the cash-out to pay off high interest credit card debt could improve your credit score, by reducing your credit utilization (as long as you don’t continue to use those credit cards).

Shorten Loan Term. Choosing a shorter loan term, such as a 15- or 20-year fixed rate mortgage can reduce the amount of interest you’ll pay over the course of the loan.


Cash-Out Refinance Cons

There are also some disadvantages associated with a cash-out refinance, including:

Closing Costs. Refinancing a home comes with closing costs, which can include: government recording costs, an appraisal fee, credit report fee, lender origination fees, lien search and title services, survey fees (if a new survey is needed), etc.

Cash Won't Be Provided Right Away. If you need the money in a hurry a refinance may not be your best option. You will need to go through an approval, processing and closing process, which could take several weeks.

Loan Terms May Change. Entering into a new mortgage loan mean new terms and possibly a new lender with new repayment conditions. And, if you choose an adjustable rate mortgage, be aware that the introductory interest rate will change when the loan adjusts.

Appraisal. If your home appraises for less than when you purchased you may not qualify for a refinance or may not be able to take cash out.

Foreclosure Risk. Taking out a larger mortgage to get cash out often means you’ll have a higher monthly mortgage payment, even if you managed to secure a lower interest rate. Should you become unable to pay the loan on-time, the lender can put a lien on your home and potentially foreclose and take possession of the home.

Private Mortgage Insurance (PMI). PMI protects the lender—not you—should you stop making payments on your loan. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is usually required. Your lender can tell you whether or not PMI will be required, based on the equity in your home and the amount you would like to borrow.


How To Get A Cash-Out Refinance

The best place to start shopping for a mortgage refinance is with your current lender. They will have much of your information already on file which makes the application process move quicker. You could even be offed a lower rate and reduced fees. However, before choosing a lender it is smart to shop around and speak to several lenders about cash-out refinance interest rates and loan terms.


Cash-Out Refinance vs. HELOC vs. Home Equity Loan

As we explained earlier in this article, cash-out refinancing is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest) and borrowing more than what is owed on the current mortgage. The first mortgage is paid off in this process and the homeowner gets a lump-sum payout of the extra cash amount at closing.

Home Equity Line Of Credit (HELOC). A Home Equity Line of Credit (HELOC) is a revolving line of credit, and operates similar to a credit card. As you repay the money spent the account is replenished. This allows borrowers to withdraw any amount up to the credit limit designated by the lender. You’ll pay interest only on the amount you use, not on the full credit line. Interest is paid at a variable rate during a draw period of typically 10 years. When the draw period ends, the interest rate may adjust to a fixed rate and monthly payments will include both principal and interest on the outstanding balance.

Home Equity Loan. A home equity loan is another type of credit that lets you borrow money from the bank against the equity of your home. The amount is determined by the difference between your house’s market value and the remaining mortgage credit. One of the most significant benefits of a home equity loan is the low fixed interest rate. Also, you may be approved for a larger amount of money, with no hassle in a short time. If you utilize the loan for home improvement, you could deduct the interest from your taxable income and lower your tax expenses.

Is it smart to do a cash-out refinance? Learn more by reading, “HELOC vs. Cash-Out Refinance: How To Decide Which Is Right For You.”


Features of a CU SoCal HELOC and Home Equity Loan

A CU SoCal HELOC or home equity loan allows you to leverage the equity in your home to help you achieve your financial goals. Whether you’re looking to start that big renovation, make emergency repairs, or simply need additional cash-on-hand, we’re here to help make it happen.

  • No points.
  • No appraisal fees for single unit loans.
  • No annual fee.
  • No closing costs.
  • A generous limit up to $250,000.
  • Possible tax deductions on interest payments.


Why Savvy Consumers Choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.

Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with a CU SoCal Member Services specialist.

Refinance Your Mortgage with CU SoCal.

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Cash-Out Refinance Pros & Cons: Should I Cash-Out Refinance? (2024)

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