December 31, 2015 in Refinancing

Should you get a cash-out refinance? Here are pros and cons

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Tapping home equity while refinancing is becoming more of a possibility for many borrowers as housing values across the country continue to increase. The real question is whether homeowners should.

Cash-out refinance

A mortgage refinance happens when the homeowner gets a new loan to replace the current mortgage, often to get a lower interest rate. A cash-out refinance happens when the borrower refinances for more than the amount owed. The borrower takes the difference in cash. Also called a cash-out refi.

In the 2nd quarter of 2015, 34% of refinances were cash-out refis. That occurred as national home prices rose 6.2% year over year.

Still, doubts over cashing out may linger for some homeowners, especially since that’s how many borrowers got in trouble during the last recession and either lost their homes or ended up underwater in their mortgages.

“It’s your house, and you have to be very careful with what you’re doing,” says Michael Moskowitz, founder and president at Equity Now, a New York-based mortgage lender. “For everyone who mortgaged their house to keep a business going, some made a fortune, but there were many people who lost their homes.”

What is it?

A cash-out refinance means you refinance your mortgage for more than the current outstanding balance and keep the difference between the old and new loans. For instance, you want $25,000 to start a business. But you still owe $100,000 on a $200,000 house. You can refinance the mortgage at $125,000 and use the $25,000 in equity you pulled out for your business venture. Depending on the rate you started with, you could end up with a lower rate and a lower payment on the new mortgage, too.

Getting a cash-out refi has its pros and cons:

Pros
  • Satisfy big expenses
  • Improve your debt profile
  • More stable rate
Cons
  • Worse terms
  • Cumbersome, and sometimes pricey, process
  • Home at greater risk

Pros of cash-out refinances

Cons of cash-out refinances

Can I get one?

If you feel confident that a cash-out refi is for you, here are the requirements that will help you score one: