Whether you want to renovate a home, pay for a wedding or make some new investments, if you need some extra cash you may have considered leveraging the equity in your home. This is also known as cash-out refinancing, and is a competitive option to consider for some homeowners.
Refinancing your home loan is where you switch from one mortgage or one lender to another. This is generally done to nab a better home loan interest rate or deal. But in the instance of getting cash out, you will be accessing your home equity by refinancing your mortgage and increasing the loan size in the process, allowing you to take out the extra money as cash.
What are the benefits and risks of a cash-out refinance?
Borrowing cash while refinancing may help pay the deposit for a second property, fund a large purchase, or consolidate debts, like credit cards and personal loans. You could also use the money for a home renovation project by opting for a line of credit, which is more suitable if you need the money in installments.
With a line of credit, you can borrow and repay the extra money on a need-basis, only paying interest on the money withdrawn by you. Some lenders will also allow you to invest the money in shares or purchase a new business, but this is decided on a case-to-case basis. It may be dependent on the level of exposure a lender is comfortable with.
Whatever your home loan purpose, it’s worth keeping in mind that by increasing your loan amount you will understandably be increasing your mortgage repayments. It is crucial that you check your budget to ensure you can afford the new higher loan repayments before you consider refinancing.
Due to the inevitable higher mortgage repayments that come with a bigger loan, it may be worth prioritising reducing your costs in the refinancing process. This may be done by opting for a low interest rate home loan, or one that charges fewer fees. You could even look at switching to a loan with helpful features that allow you to reduce your interest repayments, such as an offset account.
There is also a risk that you may refinance and extend your home loan term again. Most loan terms are 25-30 years, and if you’ve been paying off your mortgage for, say, a decade and then refinance to a new 30-year loan term, this would likely result in paying hundreds of thousands of dollars more in interest than if you just stuck to repaying the mortgage over the original loan term. Be sure to double-check the new loan term suits your goals before you sign on the dotted line for a cash-out refinance.