What are the advantages and disadvantages of utilizing the equity in your home?
A cash out refinance has advantages. If you want to get a loan, usually a mortgage is going to give you the best interest rate. For example, if you are considering making some home improvements, it is going to be cheaper to refinance than to put the repairs on a credit card with a high interest rate.
Home loans also have a big tax advantage. If you refinance or take out a home equity loan, the interest you pay on these loans is tax deductible. Some of the closing costs are also tax deductible. The biggest advantage to a cash out refinance is the cash reserves you will receive. You can use the money any way you wish. It is common to cash out in order to pay off debt, make repairs around the house or pay for college.
The biggest disadvantage is that you are usually increasing your mortgage amount, or extending your mortgage terms, which can be risky. If you were to lose your job or become injured, your mortgage may be more than you can afford and you could ultimately end up in a foreclosure. Also, by having a higher mortgage you could end up owing more on your loan than what the value of your home is, should property values fall. If your loan becomes too high, you won’t be able to sell the home if you need to. Also, you would be paying more on the home than it is worth.