A cash refinance loan is a way to tap into the equity in your home while changing the terms of your current mortgage. It just works. You are applying for a new mortgage for more 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 give you money.
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
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 lowered the rate if you made the payment time much longer.
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 are increasing your loan balance 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 more difficult to pay it off during times of financial hardship, so 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 home’s value 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 payment for 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 again or take out a home equity loan if you needed it if you were underwater, so lenders won’t lend you more than your home’s value.
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.