Pros And Cons Of Cash Out Refinance

personOtto Dargan access_timeJuly 31, 2020

As many Australians manage the financial strain of coronavirus, cash-out refinance is an option to support households by putting cash in the pockets of Australian homeowners.

Cash-out refinancing is when you take out a loan that is worth more than your original mortgage usually at a lower interest rate or for a shorter loan term, or both.

You use the loan to repay the original mortgage, and the remaining cash can be used on home improvements, debt consolidation or other financial needs.

You must have equity built up in your house to use a cash-out refinance. With cash-out refinance, you can borrow up to 80% of your home’s equity.

Mortgage refinancing is not always the best idea, even when mortgage rates are low. Before you begin the cash-out refinance process, think about why you are refinancing.

Pros and Cons of a Cash-out refinancing

Pros:

  • A cash-out refinance might help you to get a lower interest rate if you had initially purchased your home with a very high-interest rate in the past.
  • Using the money from a cash-out refinance to pay off high-interest credit cards could save you thousands of dollars in interest.
  • You can use the home equity from cash-out for strategic home renovation that will increase the equity when you sell your home.
  • If you are confident that a new degree or educational program can benefit you and unlock your possibility to earn more, then taking cash-out of your home is a good option.

Cons

  • You might have a foreclosure risk if you are unable to make payments in your new mortgage.
  • Borrowing 80% of your home’s value will add the lender’s mortgage insurance fee.
  • If you are unable to keep bad habits in check, then using a cash-out refinance amount to pay off a credit card may backfire again.
  • If you are using a cash-out refinance for debt consolidation, you have to make sure that you are not lengthening the life of the loan while you could have paid it off much quicker.
  • A cash-out refinance, like any other refinance, will come with a host of fees.
  • Your home is your valuable asset, and it should not be the first thing you look to leverage when you are in a financial pickle. It should only be used with a clear, thought out goal in mind.
  • If you wish to borrow a smaller amount, a home equity loan or line of credit home equity line of credit (LOC) may be a better choice.
  • You might feel tempted to use home equity to start a business, and it’s been done with success, but it’s also risky.

Are you undergoing a financial hardship?

If you’re struggling with getting your debt or spending habits under control, consider seeking help through a nonprofit credit counselling agency.

A nonprofit credit counsellor can assess your situations and find ways for debt relief.

They are experts at matching consumers with the solutions best suited for their needs.

Do you want to do a cash out refinance?

You need to carefully consider your situation and options before settling on a grand decision to do cash-out refinancing.

If you want to clear yourself out of risks of getting deeper into debt, you should use your home equity wisely.

Speak to one of our specialist mortgage brokers who specialises in releasing cash out with a home equity loan by calling 1300 889 743 or enquiring online.

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