Many homeowners are using cash-out refinancing as a way to pay off debt by using their home’s equity to gain access to the money they need for various situations. Many homeowners owe some sort of debt outside of their home loan, but many are using the equity that they have access to in their home to combat these outside sources and make their financial life a little easier.
There are pros and cons to using this cash-out refinance plan, but many feel that when done properly, it can be beneficial to a homeowner. While cash-out refinancing can be used for a variety of purposes and many homeowners choose this option to make improvements on their home, to pay college costs, or pay off credit cards, there is no restraint on how the money can be used.
However, homeowners choose a cash-out option so that they can avoid a second mortgage and, again, get out of debt by using their equity. A home equity loan typically attaches a second mortgage to a homeowner’s existing lien and, this can be beneficial or problematic depending upon the homeowner’s situation. If a homeowner is in a good financial position, but simply wants money to pay off debt, then a home equity loan or cash-out refinancing may be beneficial.
Yet, many financial advisers warn against using cash-out refinancing if a homeowner stands to get a higher interest rate by doing so. Some homeowners will gain access to their equity by a second mortgage if they stand to get a higher interest rate. Homeowners who may not be able to take advantage of a low interest rate may find that if they use the cash-out option they will be in a worse position.
Homeowners who need cash from their equity to pay down debt, again, will need to be aware of their current financial situation and how doing so will affect them. Some homeowners who add a second mortgage do so because they want to keep their primary mortgage which may have a lower interest rate, rather than refinancing to a higher rate. However, homeowners who want to avoid a second mortgage and can obtain an affordable interest rate from cash-out refinancing often choose this option so they can simply have one loan.
Yet, again, many advisers often caution about using cash-out refinancing as a way to deal with debt since one is essentially attaching unsecured debt to a secured mortgage, which if unpaid will result in the loss of one’s home. It’s for this reason that homeowners are highly suggested to weigh their options when it comes to cash-out refinancing and dealing with debt. Obviously, a homeowner needs to get out of debt, but cash-out refinancing is not the only way and definitely should not be an option if it can be detrimental to a homeowner’s finances later in life.