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CASH-OUT Refinance

THE PROS & CONS OF CASH-OUT REFINANCE

The Pros

  • Lower interest rates: A mortgage refinance typically offers a lower interest rate than a home equity line of credit (HELOC) or a home equity loan (HEL).
  • A cash-out refinance might give you a lower interest rate if you originally bought your home when mortgage rates were much higher. For example, if you bought in 2000, the average mortgage rate was about 9%. Today, it’s considerably lower. But if you only want to lock in a lower interest rate on your mortgage and don’t need the cash, regular refinancing makes more sense.
  • Debt consolidation: Using the money from a cash-out refinance to pay off high-interest credit cards could save you thousands of dollars in interest.
  • Higher credit score: Paying off your credit cards in full with a cash-out refinance can improve your credit score by reducing your credit utilization ratio — the amount of available credit you’re using.
  • Tax deductions: Unlike credit card interest, mortgage interest payments are tax deductible. That means a cash-out refinance could reduce your taxable income and land you a bigger tax refund.

The Cons

  • Foreclosure risk: Because your home is the collateral for any kind of mortgage, you risk losing it if you can’t make the payments.
  • New terms: Your new mortgage will have different terms than your original loan. Double check your interest rate and fees before you agree to the new terms.
  • Closing costs: You’ll pay closing costs for a cash-out refinance, as you would with any refinance. Closing costs are typically 3% to 6% of the mortgage — that’s $6,000 to $10,000 for a $200,000 loan. Make sure your potential savings are worth the cost.
  • Private mortgage insurance: If you borrow more than 80% of your home’s value, you’ll have to pay private mortgage insurance. For example, if you have a mortgage of $100,000 on a home valued at $200,000 and do a cash-out refinance for $160,000, you’ll probably have to pay PMI on the new mortgage. PMI typically costs from 0.05% to 1% of your loan amount each year. A PMI of 1% on an $180,000 mortgage would cost $1,800 per year.
  • Enabling bad habits: If you’re doing a cash-out refinance to pay off credit card debt, you’re freeing up your credit limit. Avoid falling back into bad habits and running up your cards again.

Refinance Required Documentation Checklist

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