One of the reasons you might be looking to refinance is to access the equity you've built up in your home. If you’re considering using cash out refinancing to use your equity, it's important to understand the benefits and risks associated with cash out refinancing.
What is cash out refinancing?
Cash out refinancing is the process of refinancing your existing home loan to a bigger home loan, to access some of your home equity as cash. The amount of ‘cash out’ you receive, depends on how much equity you’ve built up in your home. When you access your home equity, you’re decreasing the amount of equity in your home and increasing your debt.
The funds can be released into:
- A bank account
- An offset account, or
- A line of credit.
What are the pros of cash out refinancing?
Cash out refinancing offers a range of benefits including:
- Purchase an investment: Saving money for a deposit can be difficult, especially when you have an existing mortgage to pay off. But with a cash out loan, you can use your home equity to pay for your investments. Whether you’re looking at purchasing an investment property or you’re keen to diversify by adding some shares to your portfolio, a cash out loan can provide you with the funds to do so.
- Access cash for large purchases: And while some people choose to put their equity towards different investments, there are plenty of other big-ticket items where a bit of extra cash can come in handy. These extra funds can be used to pay for items like school fees, a new car or a holiday.
- Fund your home renovations: You can use your equity to complete renovations on your home, potentially increasing the value of your home. Completing renovations and improvements to your home is a great way to transform your property. With the right improvements, it could increase the value of your home.
- Consolidate more expensive debt: Home loans often provide significantly lower interest rates compared to other types of personal loans. If you’ve got a few different loans, it could be worth using a cash out loan to either pay off these debts or consolidate them into a single loan.
What are the cons of cash out refinancing?
While there are some benefits that come with cash out refinancing, it’s important to understand the drawbacks associated. These include:
- Increased mortgage repayments: When you access your equity, you’re essentially increasing your debt which leads to bigger repayments to cover the extra funds you have access to.
- Extended home loan term: If your repayments don’t increase, that doesn’t mean you’re off the hook. Your loan term could increase meaning you’ll have to pay off your mortgage over a longer period.
- Reducing home equity: It takes time to slowly chip away at your mortgage and build up equity and when you access it using a cash out loan, you’re essentially reducing how much home equity you have.
- Costs of refinancing: Refinancing your home loan often comes with a number of upfront costs including exit fees from your existing lender, and settlement and application fees with your new lender. It’s important to know what costs are associated with refinancing, and you can learn more here.
How does cash out refinancing work?
The cash out refinancing process is pretty similar to refinancing your home loan.
- Calculate your equity,
- Consider your reason for refinancing,
- Research and compare home loans,
- Apply for your new home loan,
- Discharge your original mortgage, and
- Prepare for settlement.
Want to know more about how cash out refinancing works? Learn more about how the process works here.
For many borrowers, cash out refinancing can be a great way to take advantage of their home equity. And while it could be a good move for you too, it’s always worth doing your own research and understanding the pros and cons that come with a cash out loan. Learn more about how Unloan’s home loan features here.
This article does not have regard for the financial situation or needs of any reader and must not be relied upon as financial product advice. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this, consider the appropriateness to your circumstances.