Cash out mortgage refinance loans are a popular vehicle for homeowners with significant equity in their homes to obtain money at a reasonable interest rate. While the advantages of extra cash in hand are intuitively obvious to anyone, there are disadvantages and pitfalls to cashing out your home’s equity that must be carefully weighed before any final decisions are made.
First and foremost, it is important to remember that the money being raised is borrowed cash and will have to be repaid over time. While interest rates are still historically low, even modest interest will add to the amount borrowed, requiring more money to be repaid than was originally raised. Equally important is the fact that it is your home that is being used as collateral against the loan. If your circumstances change and you cannot afford to make the higher payments brought about as a result of the refinance, your home will be put at risk of being taken away from you.
The overall stability of the economy in general and your local housing market in particular must also be considered before committing to a refinance. If the value of your property should decrease, your ability to sell it for the amount owed may be adversely impacted. This lesson became painfully clear to homeowners in many parts of the United States over the past few years when the housing bubble collapsed and millions of people found their mortgages "upside down" (they owed more to the bank than their houses were worth on the open market).
Finally, you need to honestly evaluate how much equity you really have and whether it is enough to justify cashing it out. Most banks will not consider a refinance to anyone with less than 20% equity and, if you’re positive value isn’t much beyond that, the various costs and fees associated with a refinance may well end up costing you more than the money being raised.
If, however, you have considerably more than 20% equity in your home and you feel that your need for the money outweighs the risks, a cash out refinance package may very well make sense for you, especially if you can refinance to a lower interest rate than you are currently paying.
