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Life happens. Illness, divorce, and unexpected home repair can hit us at any time, and sometimes we simply don’t have enough emergency funds to cover the expenses.

Up Next: Why Should I Check My Credit Report?

Cash-out refinances is a strategy some employ to cover emergencies, but it is the right plan for you?

cash out refinanceWhat Are Cash-Out Refinances?

To begin, you need to understand what a cash-out refinance is. This type of refinancing is an alternative to a home equity loan in that you are refinancing for more than what you owe, then pocketing the difference.

You Can Use That Extra Money At Your Discretion

Because you can use the cash you get from a cash-out refinance at your discretion, it can go to emergency funds if needed. However, this cash is not free and should be used wisely.

Cash-Out Refinances Lowers Your Home Equity

Remember that cash-out refinances lower your home equity, or how much of the home is actually yours. You could risk going underwater if you take out too much equity, possibly leading to foreclosure.

Talk To Your Lender Before You Take A Cash-Out Refinance

Cash-out refinances have higher monthly payments and interest rates so be sure that you are financially able to make those payments. Talk to your lender before taking out a refinance to determine if it makes financial sense for you.

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