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Pros and Cons of Cash Out Refinancing

With home values increasing and interest rates remaining low, some homeowners are choosing to generate cash from their equity. This can make a great deal of sense if you're looking to start a business, consolidate debt, send a kid to college, or remodel your kitchen. One of the simplest methods to generate cash from equity is cash-out refinancing.

What installment loans Delaware is cash-out refinancing?

Cash-out refinancing lets you use your home as a piggy bank. The homeowner takes out a new mortgage for a higher amount than the existing mortgage and takes the difference in cash. If you owe $100,000 on your house and take out a new mortgage for $150,000, you keep the difference ($50,000) in cash at closing. The homeowner can take this money and use it for any major expense, from credit card debt to medical bills. Like any refinance, this results in a new loan at a fixed interest that may be lower or higher than your previous rate.

Jane has a home in a desirable area, but her home is old and outdated. She wants to remodel her kitchen and her bathroom. Jane's home is valued at $400,000 and she owes $200,000, which means she also has $200,000 dollars in equity. She refinances her home, and takes a loan for $250,000. This leaves her with $50,000, minus fees, to spend on the island in the kitchen, new appliances, the separate shower and tub in her bathroom, and marble granite floors. She spends most of the $50,000 on upgrades. Jane's home now has a higher value, and she gets to live with the new kitchen and bathroom until she wants to sell.

What are the pros of cash out refinancing?

  • Lower interest rate: The interest rate could be lower than your current rate. If Jane bought her house in 1995, the interest rates were close to 9%. Because she refinances, her new mortgage has a rate closer to 4%.
  • It can be better than alternatives: A cash-out refinance has a lower interest rate than alternatives like a home equity line of credit (HELOC) and a home equity loan (HEL).