Understanding Cash Out Refinance Mortgage Loans: What to Look Out For

If you have built up considerable equity in your house, refinancing your mortgage to take some of that money out as cash can be a good alternative. Refinancing the $75,000 mortgage on a home worth $125,000 would allow the borrower to access up to $50,000 in cash.

The funds could be utilized for debt consolidation, home improvements, or even financial investments. Although a cash-out refinance can be a fantastic financial move, it’s important to consider a few factors beforehand.

1. How much do the costs of refinancing add up to?

A home equity loan typically has lower closing costs than a refinance. When you include in potential points and increased loan fees, refinancing may be extremely expensive.

If your current loan interest rate is low, refinancing to obtain a cash-out feature could result in a higher rate. A cash-out refinancing mortgage loan might not be the best option, but a home-equity loan could be.

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2. When do you need this cash by?

A home equity loan allows you quicker access to your funds. Closings often take only 5 days. If you need the money quickly, a cash-out refinance mortgage loan is usually not the greatest alternative.

3. Avoid falling victim to con artists.

Loan flipping is a practice employed by some lenders. They talk you into refinancing your home and using the equity to pay for some renovations. After waiting a few months, they contact you again about refinancing, this time trying to persuade you to borrow against the value of your home.

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Their plan is to have you refinance numerous times, each time adding new fees and possibly raising your interest rate, until you are in such deep financial straits that you are forced to foreclose on your home. Many elderly homeowners have fallen victim to this particular fraud, which has catastrophic consequences.

While it may be prudent to borrow money against the value of your property, it’s important to weigh all of your available options before settling on a home equity loan vs. a cash-out refinance mortgage.

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