Despite the fact that home loan interest rates have been inching upward, overall, mortgage rates have remained quite low throughout the year and this has given many homeowners the opportunity to refinance their home loan for a more affordable option. While the priority of a homeowner when refinancing may vary, many individuals have used refinancing as a way to lower their monthly costs or decrease their overall home loan payment by shortening their mortgage term.
Yet, some homeowners have turned to cash-out refinancing as a way to assist them in relieving their debt. Homeowners who may have had various unsecured debts which were causing difficulty in their life, but are in the position to refinance, turn to their home as a way to access capital from their equity and pay down the debts which were causing trouble. While this option has seemed beneficial for many, financial advisors strongly cautioned homeowners before running into a cash-out refinancing opportunity, as they may not be in everyone’s best financial interest.
Essentially, homeowners who were in a good financial position, meaning they had equity in their home, a good credit score, and the money available to afford the cost of refinancing, were able to refinance their home at a level that allowed them to get cash back from their home in the amount of unsecured debts from other sources. However, many advisers who caution against this type of refinancing point out that homeowners are just basically moving debt around and not really erasing what they owe.
Also, homeowners who may have difficulty managing their finances and attach unsecured debt to a secured mortgage could face trouble down the road if they do not properly focus funds towards repaying their higher mortgage debt. While some homeowners have used this cash out refinancing opportunity as a way to clear their debts and, as a result, have focused as much money as they can on paying down their mortgage, other homeowners may have slipped back into poor financial habits and acquired additional debts, meaning they now had to meet a higher mortgage debt and alternative unsecured debts.
One result of homeowners who use cash-out refinancing but do not properly manage their money afterward is the loss of a home to foreclosure. Obviously, unsecured debt when attached to a mortgage can be problematic in that homeowners who acquired debt beyond their means to repay simply cannot meet this financial obligation and may face foreclosure as a result. While, there have been homeowners who have benefited from cash-out refinancing, speaking to a housing or financial counselor, taking stock of one’s financial position, and weighing the pros and cons of cash-out refinancing has been suggested by many advisers before homeowners enter into to this type of refinancing.