3 risks of a cash refinancing loan
Image source: Getty Images
A cash refinance loan is a way to leverage the equity in your home while changing the terms of your current mortgage. It just works. You apply for a new mortgage for more money than you currently owe. If you qualify based on your financial information and the value of your home, the lender offering the withdrawal refi will pay off your current home loan and reimburse you.
Cash refinance loans can give you the cash you need to pay off debt, renovate your home, or finance big purchases. But taking on this type of debt comes with risks. Here are three.
1. You could end up increasing the total cost of your mortgage repayment
A cash refinance loan changes the terms of your current mortgage. This could include both the interest rate and the repayment schedule.
If you increase the interest rate on your current loan, your mortgage would increase over time because you would pay a higher cost of borrowing. But you could also end up paying higher borrowing costs even if you lower the rate, if you lengthen the repayment period much.
For example, if you had 10 years to pay off your current loan but took out a cash refinance loan into a new 30-year mortgage, adding 20 years of interest charges would inevitably increase borrowing costs. even if you lower your rate.
2. You can increase the risk of foreclosure
When you take out a cash refinance loan, you increase your loan balance amount because you are borrowing more than you previously owed. In many cases, this means that your monthly payment will become more expensive even if you lower your interest rate and keep a similar repayment term.
If your loan costs more to pay each month, it might be harder to pay it off during times of financial difficulty. foreclosure may be more likely to occur as a result. Losing your home to foreclosure can be financially devastating.
3. You could end up owing more than the value of your home
Taking out a cash refinance loan reduces the equity in your home since your loan balance will now be higher relative to the value of the home due to the borrowing of additional money. This increases the chances that the value of your home will fall below what you owe it.
If this happens, you are said to be underwater on your mortgage.
Being underwater means that selling your home becomes more difficult. The proceeds from the sale would not be enough to pay off your loan in full if you received the market value of the property. You will need to find the difference to repay your lender or try to arrange a short sale where the lender accepts less than full payment. You also couldn’t refinance or take out a home equity loan if you needed it if you were underwater, then lenders will not lend you more than the value of your home.
These are serious risks to consider, so before choosing a refinance loan with withdrawal, make sure you are comfortable with the potential drawbacks. When you put your home at risk, you need to be 100% sure that you are making the right financial choice.
A historic opportunity to potentially save thousands on your mortgage
There is a good chance that interest rates will not stay at multi-decade lows any longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger to buy a new home.
Our expert recommends this company to find a low rate – and in fact he used them himself for refi (twice!).
We strongly believe in the Golden Rule, which is why the editorial opinions are our own and have not been previously reviewed, endorsed or endorsed by the advertisers included. The Ascent does not cover all the offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.