Pros and Cons of Using a Cash-Out Refinance to Pay Off Debt

Are you a homeowner who is struggling with high-interest debts? Then you may have heard of a debt payoff solution called cash-out refinancing.

What Exactly is Cash-Out-Refinancing?

A cash-out refinance allows you to replace your existing mortgage with a new home loan that’s for more than what you currently owe. The difference between your old loan versus your new loan provides you with the additional funds needed so that you can consolidate and pay off your debt.

But before you decide to forge ahead with a seemingly simple financial strategy, it’s important to fully understand both the benefits and drawbacks of using your home’s equity to consolidate your debt.  

Pros of Cash-Out Refinancing

  • Ability to Access Significant Funds: If your home has a high amount of equity, you may be able to qualify for tens or even hundreds of thousands of dollars with a new loan. If you have substantial debt, having access to a large amount of money can provide you with the necessary resources to pay off your debt and regain control of your finances. 
  • Relatively Low Interest Rates: When you refinance your mortgage, you can generally expect lower interest rates than with other loan types. You’ll find cash-out refinancing especially beneficial if you originally bought your home when mortgage rates were much higher and can now take advantage of receiving a lower rate. 
  • Longer Repayment Periods: Because the repayment of your loan is now wrapped into your new mortgage, you have the ability to continually make one monthly payment over an extended period of time. For most homeowners, this timeline typically ranges from a 15 to 30-year loan period.
  • Higher credit score: Using a cash-out refinance to pay off your existing debts can instantly help boost your credit score by greatly reducing your credit utilization ratio. And given that this ratio accounts for 30% of your FICO score, the lower you can make it, the higher your score will be.  

Cons of Cash-Out Refinancing

  • High Closing Costs: Taking out any mortgage loan comes with substantial up-front fees known as closing costs. On average, closing costs are typically 2% to 5% of your mortgage. For example, if your loan is around $200,000, you can expect a closing cost around $4,000 to $10,000. So, whether you choose to write a check, take a higher interest rate, or roll them into your loan balance, know that you will be financially responsible for paying those associated costs.
  • Interest Costs: Taking out a new loan on your home means that any previous payments on your housing debt up until this point are effectively erased, and the clock is reset on your loan repayment period. As a result, your lifetime interest costs are increased.
  • Increased Risk of Foreclosure: The biggest potential negative and most crucial point to consider is the elevated risk of losing your home. Because this type of loan is regarded as a secured loan where your home is the collateral, any inability to repay could result in your home’s foreclosure. 

At the end of the day, deciding to proceed with a cash-out refinancing isn’t one that should be taken lightly. It’s critical that you have a solid understanding of both your current financial situation and future goals to determine whether or not it’s the right decision for you. After all, you’re dealing with your greatest asset and personal investment: your home.  

If you’re interested in learning more about cash-out refinancing and other possible alternative debt solutions for your unique financial situation, contact ACCS. Our debt specialists are here to assist and help answer any questions you may have. Request a Custom Debt Relief Plan today at no cost or obligation to get started.

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