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What do I need to know about a cash-out refinance?

What do I need to know about a cash-out refinance?

These days, there are still plenty of homeowners who can benefit from refinancing their existing mortgage, even after rates have risen sharply over the past several months and millions already sought to refinance when rates were at or near their lowest points. Many who did so may have also taken advantage of the sky-high affordability at the time to engage in a cash-out refinance, but those who have yet to go through the process might not know what their options are here.

First and foremost, it's vital to understand what a cash-out refinance actually is. Simply put, it's a refinance that gives owners more money than they owe on their existing mortgage, which allows them to put the extra cash – usually at least a few thousand dollars, but often more than that – toward other financial concerns, such as home improvement efforts, funding a child's college education or paying down debt with higher interest rates.

Growing in popularity
Many homeowners are now choosing to use cash-out refinances as a way of tapping their existing equity, according to new research from MarketWatch. Today, more than 60 percent of all refinances are cash-out, in line with the levels seen a few years before the housing market crash. This is hardly a surprise, because while many homeowners can still cut their costs despite rising rates, the primary financial benefit comes from getting more money than the existing mortgage balance.

"As people stay in their homes longer we see people reinvesting in their homes by using equity to update their homes and do repair work," Rick Sharga, executive vice president for Carrington Mortgage Holdings and an industry veteran, told MarketWatch.

Weighing the options
As with any other major financial decision, consumers need to understand all the implications of a cash-out refinance before taking the leap, according to Student Loan Hero. For instance, they will need to assess whether tapping their existing equity could put them at greater risk for falling behind on their payments (which would necessarily rise with a cash-out refinance), or affect their future finances in other ways.

Paying off unsecured debts – that is, debts like credit card balances not tied to any particular asset – with secured debts – like a mortgage – can put them at risk for losing their homes if they can't deal with the additional cost. With that said, if a cash-out refinance is used to fund home improvements that could significantly increase the value of a home, there's an opportunity for a good return on investment here.

Finally, it's important for consumers to shop around for a cash-out refinance, as they could face some surprising loan terms that may not always be favorable, according to Bankrate. This is important because cash-out refinances will typically carry a higher rate than a traditional refinance, and that added cost may need to be further accounted for to ensure owners can truly afford them.

When homeowners do all the necessary research, they will typically be in a good position to make sure their mortgage terms work for them given their unique financial situations.

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