3 Risks of a Cash-Out Refinance Loan

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A cash refinancing loan is a way to take advantage of your home equity while adjusting the terms of your existing mortgage loan. It simply works. You are applying for a new mortgage with more money than you currently owe. If you qualify based on your financial credentials and the value of your home, the lender offering the refund will repay your existing home loan and give you some cash.

Cash refinancing loans can give you the money you need to pay off debt, remodel your home, or finance big purchases. But there are risks associated with acquiring this type of debt. Here there are three of them.

1. You may end up making your total mortgage payment costs higher

A cash refinancing loan changes the terms of your existing mortgage loan. This can include both the interest rate and repayment schedule.

If you raise the interest rate on your existing loan, you will make your mortgage more expensive over time because you will pay a higher borrowing cost. But you may also end up paying higher borrowing costs even if you lower the rate, if you make the return time much longer.

For example, if you have 10 years left to pay off your existing loan but take out a loan to refinance cash into a new 30-year mortgage, adding another 20 years of interest expense will inevitably increase your borrowing costs even if you lower the interest rate.

2. You can increase the risk of foreclosure

When you take out a cash refinancing loan, you are raising the size of the loan balance because you are borrowing more than you owed before. In many cases, this means that your monthly payment will become more expensive even if you drop the interest rate and keep the repayment time the same.

If your loan costs more to pay each month, it can be difficult to pay it off in times of financial hardship, so foreclosures are more likely to occur as a result. Losing your home to foreclosure can be financially devastating.

3. You could end up owing more than your house is worth

Getting a cash refinancing loan reduces the equity in your home because your loan balance will now be greater relative to the value of the home as a result of borrowing extra cash. This increases the chances of your home depreciating below what you owe it.

If this happens, you are said to be underwater on your mortgage loan.

Being underwater means that selling your home becomes more difficult. The proceeds from the sale will not be enough to pay off your loan in full if you have paid the market value of the property. You will have to find the difference to pay the amount to your lender or try to arrange a short sale where the lender will accept less than full payment. You also can’t refinance back or take out a home loan if you need to if you’re underwater, so lenders won’t loan you more than your home is worth.

These are serious risks to bear in mind, so before you choose a cash refinancing loan, make sure you are comfortable with the potential downsides. When you put your home on the line, you must be 100% sure that you are making the right financial move.

Historic opportunity to save thousands from your mortgage

Chances are that interest rates will not remain at multi-decade lows for much longer. That’s why taking action today is so important, whether you want to refinance and lower your mortgage payments or you’re ready to start the process of buying a new home.

Our expert recommends this company find a low rate – and in fact use it himself to reevaluate (twice!).

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