Is cash-out refinance a good idea — even during a pandemic?

For some homeowners who have paid down their mortgages and who have significant equity in their homes, a cash-out refinance loan may seem attractive due to current low-interest rates on home loans. This is especially true for those facing financial adversity due to the COVID-19 pandemic who want to get their hands on extra cash.

However, cash-out refinancing during the coronavirus pandemic doesn't make sense for everyone. Before you move forward, you may want to consider a few key factors that will help determine if borrowing against your home is the right choice for you.

What is a cash-out refinance?

It's a special type of refinance loan. It involves taking out a new loan not only to repay your current debt but also to borrow more than you already owe on your home so you receive cash back.

If you have a $300,000 loan on a house worth $500,000, a cash-out refinance loan would allow you to pay off the current $300,000 and borrow some additional money. Your cash-out refi loan might be for $350,000 so you could pay off your current lender and walk away with $50,000 you can use for any purpose.

WHAT IS CASH-OUT REFINANCE AND HOW DOES IT WORK?

Cash-out refinancing lets you tap into equity in your home so your money isn't tied up in the house if you need it. It's different from other ways of getting cash out of your home, such as a home equity loan or home equity line of credit. Either of these other two options would require you to have two loans while a cash-out refi lets you have just one. A HELOC also provides you with a line of credit you can draw from as needed, while a cash-out refinance loan would give you a specific lump sum of money upfront that you'd pay back on a fixed schedule over time.

Does it make sense even during a pandemic?

If you can qualify for a good mortgage refinancing rate and you have a solid reason to take cash out of your home during a pandemic, a cash-out refinance may make sense.

PERSONAL LOAN OR HOME EQUITY LOAN: WHICH IS BETTER?

For example, you may want extra money for debt consolidation or to cover living costs during the pandemic.

You do need to qualify for mortgage refinancing though, which means you need a good credit score, proof of income, and equity in your home. If your new loan is for more than 20 percent of the value of your home, you'd likely have to pay for private mortgage insurance (PMI). If you've lost your income or your property value has fallen during the coronavirus lockdown, you may not be able to get a cash-out refi loan.

What are the benefits of cash-out refinancing?

If you have lots of equity in your home, getting some money out of it could be an affordable way to get access to the cash you need during the COVID-19 pandemic. Because a mortgage loan is a secured debt, the interest rate is usually lower than other types of loans, such as a personal loan, so a cash-out refi could be one of the cheaper ways to borrow.

HOME EQUITY LOAN VS. HELOC: WHICH IS BETTER?

A cash-out refinance loan could also reduce the interest you're paying on your current mortgage balance as interest rates are near record lows right now due to the Federal Reserve's efforts to stimulate the economy. When you qualify for a low mortgage refinancing rate, borrowing extra money against your home may not raise your payment by much -- if it raises it at all. If you extend your repayment term or substantially lower your interest rate, your monthly payment could stay the same or even go down. Of course, if you take longer to pay off the debt, you'd end up owing more total interest over time even if your monthly payments are the same or less.

Are there other options?

If you can't qualify for that specific loan right now because you're struggling financially due to COVID-19, you should talk with your lender about mortgage relief options. Most lenders are willing to put your loan into forbearance, although interest will continue accruing.

EVERYTHING YOU NEED TO KNOW ABOUT MORTGAGE REFINANCE

Just be sure you research mortgage options carefully, avoid falling for mortgage myths, and understand your loan options so you don't put your home at risk.