Cash-Out Refinance

What is Cash-Out Refinance?

A cash-out refinance term is generally used in a Home Loan. It refers to when you take a new home loan for a higher amount than what you owe on your current home loan. Ideally, it means taking a new home loan.

You can spend this loan amount on home improvements, debt consolidation, purchasing an investment property, education expenses and other financial needs. You should build some equity in your house (Market value of the home-owner) to use a cash-out refinance.

Cash-out Refinance Example

For instance, let's consider you owe Rs 10 Lakh on your home and it's now worth Rs 50,000 Lakh. Assume that refinancing your current mortgage may get a lower interest rate and you can also use the cash to renovate your master room and kitchen. As per most lending rules, you are required to maintain 20% equity in your home after a cash-out refinance. So you would be able to withdraw the remaining amount.

Pros of Cash-out Refinance

1) Lower Interest Rates

You might get a lower interest rate when you use a cash-out refinance. The difference in rate will rely on the home you bought. In case you bought a home when the rates were high, then you are likely to get a better rate now. If you have taken a mortgage a few months ago then, you probably won’t see a significant difference.

A mortgage refinance offers a lower interest rate than a home equity line of credit. A cash-out refinance can give you lower interest rates if you bought your home when mortgage rates are much higher.

2) Debt Consolidation

Many people use this loan to pay off their high interest credit cards due as this saves from interest.

3) Improves Credit Score

When you pay your credit card dues by taking cash-out to refinance, it helps to rebuild your Credit Score by reducing your credit utilization ratio.

4) Tax Deduction

Mortgage interest is tax-Deductible. You can deduct the interest paid on it upto a certain limit.

Cons of Cash-Out Refinance

1) New Loan Terms

Your new mortgage loan will have different conditions as you are already serving the first home loan. Therefore, check twice before you agree to the new terms and conditions. In case you opt for a longer-term on your new loan, then there are more chances of paying higher interest in the long run.

2) More Fees for HELOC

Home Equity Line of Credit (HELOC) is known for its low-fee options when you go for your home equity. Some lenders don’t require closing fees for a home line of credit.

3) Home Risk

Failing to repay a loan means you are losing it to foreclosure. Therefore, before taking any loan, ensure you have the ability to repay on time or else it will hamper your financial condition.