With traditional refinancing, a new home loan replaces the existing mortgage. Utah homeowners go this route for a number of reasons, like locking in a lower interest rate or switching from an adjustable-rate mortgage to a fixed-rate loan.
Cash-out refinance loans are a bit different. The original mortgage is still replaced, but with a loan of a larger amount than what is owed on the home. The extra money goes into the borrower’s pocket at closing, and because the property is used as collateral, lenders are often able to offer low rates on these types of loans.
Does a cash-out refinancing make sense for your financial situation? To help answer that question, consider the following.
Advantages of Cash-Out Refinance Loans
Many Utah homeowners find that cash-out refinancing comes with major benefits. The upsides include:
- The opportunity to turn home equity into cash by borrowing up to 80 percent of the property’s value
- The ability to use the cash-out funds for debt consolidation, home improvements or any other purpose
- The potential to change to another mortgage program or to change the length of the home loan
In addition, because the money received comes from a refinance loan, it isn’t considered to be income. As such, homeowners don’t have to worry about paying taxes on cash-out funds.
Drawbacks of Cash-Out Refinance Loans
While cash-out refinancing can be a smart choice, no mortgage option is right for everyone. The potential downsides to consider include:
- Re-starting the mortgage term and being obligated to make another 15 or 30 years of loan payments
- Needing to pay closing costs on the new home loan, which can be between two and six percent of the total
- Owing more on the loan than what the property is worth is a possibility if the home’s value happens to drop
Also, homeowners who refinance may face prepayment penalties. Some mortgage lenders charge this fee anytime a loan is paid off early, and cash-out refinancing does involve paying off an existing mortgage.
Advice on Cash-Out Refinancing
Tapping into your home equity by means of a refinance loan may be the ideal solution. Then again, Utah homeowners have other options – and depending on your financial situation and future goals, taking out a home equity loan (HEL) or a home equity line of credit (HELOC) could be a practical alternative.
Only you can determine if a cash-out refinancing is the right choice, but the mortgage professionals at Intercap Lending can provide you with the information, answers and advice you need to make a smart decision.
For more on cash-out refinance loans, or to explore the borrowing options for homeowners in Utah, contact us today.