Use it for the right reasons. You can use a cash-out refinance loan to consolidate debt, make home improvements, pay for college, or buy property. Just be sure that the priority of what you're using the money for outweighs the closing costs and the possible financial hit you may take if the value of your home goes down. Using your property for investments means managing the risks associated with loaning and investing money, otherwise known as asset-liability management.
There's always more than one way to skin a cat. For example, an alternative to cash-out refinancing can be home equity financing (see the comparison lists below) -- always get the scoop on all the options available, then pick the one that best fits your situation.
Cash-out refinancing:
- One loan with a monthly loan payment
- Your existing mortgage is refinanced for a higher overall amount using some of the accumulated equity in your home
- Get available funds and spread the payments out over a longer term
- Could have a lower interest rate than home equity financing
Home equity financing:
- You can choose between a lump sum loan or a revolving line of credit
- You can borrow a portion of your home's equity
- Flexibility in loan repayment: shorter term to pay the loan off sooner or reduced monthly payments over longer term
- On a line of credit, interest is only paid on the funds you draw
Tip #1: Pay it forward: Use the cash from your refinance on useful investments that could pay dividends in the future, like home improvements, improving your business, or getting a degree. Anything that can result in gaining some personal or financial equity down the road is a good thing.
Tip #2: Get a good-faith estimate: Most lenders should provide a good-faith estimate of closing costs within three business days of receiving your loan application -- an estimate is particularly helpful when you're trying to avoid hidden closing fees. If the lender doesn't provide you with an estimate, and still won't when you contact them, it's time to look for another lender.
Tip #3: Get it all in writing: A verbal promise from a friendly loan officer sounds great, but don't settle for anything less than a written statement of the loan terms, which should include your interest rate, length of rate lock, and other details of the loan program.
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