Understanding Whether Cash-Out Refinancing is Right for You

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understanding cash-out refinancing

There are several different reasons why homeowners may choose to refinance their mortgage, and several types of refinancing that meet these needs. Some are doing so to pay their home off earlier, while others may be refinancing to get a better rate, lower payments or another specific benefit.

At VIP Mortgage Inc., we’re proud to assist our clients with a variety of mortgage refinancing needs, including one type that’s useful in several different circumstances: The cash-out refinance. Let’s go over what a cash-out refinance is, some common reasons why homeowners utilize them, and whether this is the right kind of refinancing for you.

Cash-Out Refinance Basics

Any refinancing situation involves replacing your current mortgage with a new one, and in the case of the cash-out refinance, this new mortgage is for a larger amount than the original one was. This extra cash is paid directly to you, the borrower, at the time of closing – essentially, you’re refinancing for more than what you owe to allow yourself to cash out on some of your built-up equity.

As you may have guessed, you need to have equity built up to begin this process. Also keep in mind that you could end up owing more interest on future payments due to owing more, and there may be a limit to how much cash you can receive on a cash-out refinance.

Common Reasons for Cash-Out Refinancing

Why do homeowners consider cash-out refinancing? Here are some common reasons:

  • Lower interest: In some cases, cash-out refinancing comes with lower interest rates on your monthly payments.
  • Debt consolidation: Cash-out refinances provide much-needed financial infusions for those struggling with other forms of debt, such as credit cards.
  • Home improvements: Many homeowners use some or all of the funds from a cash-out refinance to make improvements, repairs or renovations to their home.
  • New car: Others may use this money to put money down on a new vehicle.
  • Tax deductions: If you use the money for home improvements, as we noted above, you may be eligible for tax deductions at the end of the year.
  • Tuition: Another common use of a cash-out refinance for some homeowners is to help pay college tuition for a child on their way to university.

Is It Right For You?

Now, cash-out refinancing isn’t necessarily for everyone. If you’re just going to use the cash as a band-aid for debt, rolling it over from one format to another, we recommend other forms of improving your finances instead. Cash-out refinances should be done when the conditions are favorable and you’ll specifically benefit, such as a home improvement where you need funds now but will be improving your home value by making the upgrades.

For more on cash-out refinancing, or to learn about any of our mortgage rates or other services, speak to the staff at VIP Mortgage Inc. today.

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