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Cash Out Mortgage Refinancing Pros and Cons

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piggybank Cash Out Mortgage Refinancing Pros and ConsAre you a homeowner in need of cash and are considering taking out equity in your home? Borrowing against your home’s equity is a way to consolidate bills, pay medical or educational expenses, or make home repairs. Understanding the different types of home equity loans will help you avoid paying too much for the financing; here are several tips to help you decide if borrowing against your equity is right for you.

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Cash Out Mortgage Refinancing

Refinancing your home with cash back means taking out a new mortgage to pay off your existing loan while borrowing more than the payoff balance of your loan. The difference between your payoff balance and the amount you borrow will be paid to you in cash at closing. Cash back refinancing is great for homeowners who have a significant amount of equity to borrow against or if you need to improve the terms of your existing mortgage. It is important to remain in your home long enough to recoup the expenses from refinancing your existing mortgage.

Second Mortgage Loans

Taking out a second mortgage will get you a higher interest rate than if you were refinancing with cash back. The reason for this is that your home will be secured by two loans often from different lenders. The second lender shoulders more risk than the first and will pass that risk on to you the borrower with a higher mortgage rate. Second mortgages cost less in upfront fees than refinancing; however, because the loan is secured by your home the rates are typically lower than signature loans or credit cards.

Home Equity Lines of Credit

Using a Home Equity Line of Credit allows you to borrow as you need money and have the advantage of paying interest only on the loan’s balance. A home equity line can be an extremely flexible and many offer debit cards for ease of access to your funds. There is additional risk involved with a Home Equity Line of Credit as the ease of access to your equity may result in borrowing more than you intended. If you have difficulty managing your money this might not be the best loan for you.

Tax Deductible Interest

The interest you pay on cash out refinancing or home equity loans is typically tax deductible. If you borrow more than your home is worth or if you have second mortgages for more than $100,000 the IRS could deny your deduction.

Is a Home Equity Loan Right For You?

Make sure the reason you are borrowing warrants dipping into your equity. While the equity in your home belongs to you, it doesn’t make sense to borrow for something like a vacation or to purchase an automobile. If you need cash for some financial goal or to make improvements to your home or even start a business, cashing out your equity could be a wise financial decision. Remember that your home should not be the piggybank you dip into whenever you need a cash fix.

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