• Penny L.

Cash Out Refinance: Is Now the Perfect Time?

Updated: Aug 10

For most homeowners, their biggest monthly payment is their mortgage. The quality of your financial life can be drastically affected by the size of your mortgage payment. When interest rates decline, this entices many homeowners to consider the benefits of refinancing their mortgage. If you have equity, this also makes it possible to get cash out by refinancing. Is it the perfect time to do a cash out refinance right now?


Create a Nest Egg


One of the biggest benefits of doing a cash out refinance is that you can build up your cash reserves. Instead of having that equity sit there where you can't use it, you can convert that to cash. Then when opportunity knocks, you'll be ready with cash in hand. Whether you want to buy an investment property, pay off some high-interest credit cards, or take a relaxing trip, this makes it possible.


If you like the idea of having some extra cash in the bank, this might be the time to take advantage of low interest rates. If rates turn and start to increase, then accessing the equity in your house becomes more difficult. Instead of getting a low, affordable monthly payment, your cost to get cash out would be higher. At a certain point, it won't make sense to take cash out anymore. You never know when you'll need access to some cash.




Long-Term Consequences


While having access to cash quickly and easily is attractive, it also comes with some potential drawbacks. By doing this type of loan, you are using up the equity that you've worked so hard to grow. That equity might have come after many years of making your house payment every single month. Do you want to use up that equity again on something frivolous?


If you're going to access the cash from your equity, make sure that it's for a good cause. When you borrow more money, that can have an impact on your credit score by maxing out your available credit. There are plenty of good reasons to use the equity in your home and take cash out. However, you don't want to sacrifice long-term benefits for a few short-term gains. Make sure you've got a plan in place and that you think it's worth it to use your equity.


Fees


Another factor that you'll have to consider is the fees involved. When you take out a new loan, there will be closing costs. In some cases, that can add up to several thousand dollars. This means you'll either have to come up with that cash or you'll have to roll them into the loan. If you roll them into the loan, that means you're effectively eating up more of your equity. It may still be worth it, but it's good to compare loan fees if you're looking at a few different options.


Overall, now may be a great time to take advantage of the low interest rates. If you've got equity in your home, you can access it for minimal cost, while using it for something important. Just make sure you fully consider the long-term ramifications of doing so.