The 5 Benefits of a Cash-Out Refinance
By: Ditech Blog
It’s really not a secret: Interest rates are expected to rise. And before they do, many homeowners have been taking advantage of the benefits of cash-out refinancing – so many, in fact, that cash-out refinances have recently reached the highest levels since the 2008 recession.
To give you the gist, cash-out refinancing is when you replace your current mortgage with a new one that has a larger outstanding principal balance, and you get the difference in a lump sum of cash.
But, back to those benefits.
If you’ve built up enough equity in your home, it may be a good idea to go through with a cash-out home refinance. Here are 5 reasons why you might want to.
1. You can use the cash you get for major expenses.
It’s in the name. Depending on how much equity you’ve accrued in your home, you may be able to walk away with a serious lump sum of cash.
The best news? What you do with that cash is up to you. Some popular things people use this money for are financing college or funding a major renovation – it’s your call. Just understand the implications before you make your financial decision.
2. You may be able to consolidate your debt.
With the average credit card interest rate just over 16%, and mortgage interest rates so relatively low, it may make sense to use the money you get from a cash-out refinance to consolidate your debt. Paying off your credit card bills now could mean paying significantly less over time.
But just like any financial move, there are pros and cons to paying down your debt. Just make sure to consult your financial adviser first.
3. You may be able to improve your credit score.
Speaking of paying off your debt, doing so may also have a positive impact on your credit score.
By using cash from a cash-out refi to pay down your high-interest credit card debt, you could reduce your credit utilization score (your total credit card balances divided by your total credit card limits).
That number has a big impact on your credit, so lowering it may give your score a bump.
4. You can reinvest the cash you get back into your home.
Thinking about refinancing to pay for home repairs or renovations? You may be able to increase the value of your home in the process.
If that’s the goal, do your homework before knocking down any walls. Some renovations have higher returns on investment than others. For example, did you know that adding insulation has the highest average ROI for home improvement projects? You might be surprised how your renovations and repairs affect your home’s value.
5. You may be able to shorten your loan term and/or get a lower rate.
By refinancing, you’re taking on a new loan. And while you may be able to get cash out from this transaction, you may also be able to shorten your loan term or get a lower rate. That means you may be able to lower your monthly payment or even pay less over the life of your loan.