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Should You Get a Cash-Out Refinance Loan?

Unexpected events that cause us to have to come up with lots of money fast happen all of the time. An immense medical bill or some other huge expense can come at any time. One way to get the money for these types of expenses is to obtain a cash-out refinance loan. It is tempting see this as a desirable way to get money fast. However, before you go exchanging your entire home for a couple of Ben Franklins, you should consider the consequences of a cash-out refinance loan. When you get a cash-out refinance loan, you are agreeing to renegotiate your mortgage for more than what you currently owe. You are not getting a second loan. Instead, you are replacing your first loan with a loan for a greater amount and using the cash difference for other expenses. You can often negotiate a significantly lower interest rate, but you are increasing the term of your loan exponentially. This means that it will take additionally 5, 10, or 20 years to pay back a loan that you already owed. Because of this, it is important to make sure that you only use a cash-out refinance loan when you have no other alternatives. You also should avoid getting a cash-out refinance loan to pay for indulgences like a vacation. It makes no sense to free up cash from your home mortgage for a vacation that will take 20 years to repay. Another reason a cash-out refinance loan is an "emergency-only" type of loan is the closing costs. There are other home equity loans that are less expensive and do not involve closing costs. Cash-out refinance loans often have closing costs averaging hundreds or thousands of dollars. Bottom line: If you are pressed for cash, check out other options before settling for a cash-out refinance loan.