Do Cash-Out Refinances Cost More?

The last thing homeowners want is to spend more on their homes. When researching cash-out refinance rates, it’s important to determine whether the refi will actually cost more than other kinds of refinancing. There are many factors to consider when answering this question. Here are some things to keep in mind:


Interest Rates

 A cash-out refi is a process of replacing your current mortgage on your home with a loan that is bigger. Homeowners are able to take the extra money and use it for whatever they would like. Alternatively, there is also what is known as “rate and term” loans, where the new mortgage would offer lower interest rates or better terms than your current loan. In general, cash-out refinance loans usually have a higher interest rate, because they offer more risk to the lender. Sometimes, homeowners will have to pay for added points for cash-out refis, as well.


Will You Save Overall?

 Determining what kind of loan you should seek is a big-picture financial question. If you are simply looking to reduce your monthly payment or be able to pay off your home faster, a rate and term loan would be less expensive overall. But if you want to use your cash-out refi to pay off high-interest credit card debt, medical bills, or student loans, you may save money in the end. Financial experts warn against using the money from a cash-out refi for things like fancy vacations or spending sprees. It’s also risky (but a risk that may pay off) to use the cash for a business venture. However, if you’re planning substantial home improvements, you may discover attractive tax benefits. If you plan accordingly, you can reduce your overall debt and costs.


Closing Costs Are Similar

 When it comes to cash-out refinancing and a more traditional rate and term loan, the closing costs will be similar. However, if you are taking out a larger loan, keep in mind that some of the costs will operate as a percentage of your loan. That means that a traditional refinancing will be slightly less expensive in terms of fees just because it is a smaller amount. Be sure to talk to your lender so that there are no surprises when it’s time to sign the papers. Some loans will allow you to roll these costs into your monthly payment, but they will always be something to consider.

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