Should you consider cash-out refinancing?

What is cash-out refinancing?

Cash-out refinancing means replacing your current mortgage with a larger one and taking the difference in cash. For example, if you have a $200,000 home and a $120,000 mortgage you might choose to refinance it with a $150,000 loan, taking $30,000 in cash when the new loan closes.

Why should you undertake a cash-out mortgage refinance?

In some cases, cash-out refinancing can improve your financial position. Cash-out refinancing can be the least expensive way to borrow because the loan is secured by real estate. In the process, you should also be able to secure a lower mortgage rate or better terms. You should consider cash-out refinancing instead of home equity loans if all of the following are true:

  • You can improve on the rate of your current mortgage.
  • You will save enough by refinancing to recoup the cost of doing so in the time that you expect to own your home.
  • You have enough home equity to be approved for a cash-out refinance.

Why shouldn't you cash-out home mortgage refinance?

  • Cash-out refinancing is considerably more expensive than getting a home equity loan. Unless you can get significantly better terms on the new loan, leave your current mortgage alone.
  • Cash-out refinancing restarts the clock on your mortgage payoff. If you've been paying on your home loan for 5 years, taking a new 30-year mortgage puts you back at square one, meaning you might pay a lot more interest in the long term.
  • Refinance lenders charge more for cash-out refinances than rate-and-term refinances. Make sure that you account for these costs when evaluating your options.

To help determine if cash-out refinancing is for you, run your numbers through this free refinance loan calculator.