Pros And Cons Of A Cash-Out Refinance
The last great reason you might take a cash-out refi is to maximize your savings and investments. If your house has a ton of value, you can’t access that money unless you do one of two things: refinance your home or sell it. Let’s look at the potential benefit of refinancing your house.
Let’s assume mortgage rates are in the low 5% range. Warren Buffett is often cited as saying that over the long term (10 years or more), the average return for the stock market is around 7%. You should only rely on this role if you’re a buy-and-hold investor in a broad market index. Year-to-year returns or those based on individual stocks can be much more volatile. However, if you invest in a broad index and have a decent mortgage rate, you can make more money by investing your cash rather than blowing your savings on one big check to pay off your house. It frees up your cash for other opportunities.
While % of us aren’t likely to become billionaires with a reported 1.05% interest rate on our mortgage, because interest rates are typically lower for mortgages than for most other loans, it can make sense to have a mortgage for most people. You can also write off the interest on your taxes.
With that in mind, you can use a cash-out refinance to build a college fund or boost a retirement fund. You can use it for building an investment portfolio. This can be flexible for your financial goals.
Alternatives To A Cash-Out Refinance
A cash-out refinance isn’t the only home equity loan option out there. Let’s talk about these alternatives and how they stack up to a cash-out refi.
Home Equity Loan
A home equity loan is a second mortgage taken against the equity on your house. You can take out this mortgage for a portion of what you have in equity. They have lower interest rates than a personal loan. Rocket Mortgage ® does not offer home equity loans.
But how do home equity loans compare to a cash-out refinance? They both offer lump-sum payouts and can have low interest rates. The main difference is that cash-out refis are one loan, where a home equity loan is a second mortgage. Also, home equity lenders usually pay all or most of the closing costs of the new mortgage.
HELOC (Home Equity Line Of Credit)
Another alternative is a HELOC (home equity line of credit). When you take out a HELOC, it’s split into two periods: the draw period and the repayment period. A draw period typically lasts 5 – 10 years, where you can borrow up to 80% of your home’s equity. Rocket Mortgage ® does not offer home equity lines of credit.
The repayment period starts when the draw period ends. Most of the time the repayment period lasts 10 – 20 years. When compared to a cash-out refi, HELOCs can be cheaper at face value. That’s because you don’t pay all the closing costs associated with a refinance. However, you don’t get the benefits associated with a refinance, which could mean a lower rate and/or changing your loan terms.
Before applying for a cash-out refi, you should run the numbers and weigh the pros and cons. This is a big-league financial decision, so base it on hard numbers, how much equity you have and what you’re using the money for.
- You’ll get a better interest rate because the lender gets first position on your title.
- You could refinance to a lower rate with different loan terms.