A cash-out refinance is a way to replace your current mortgage with a new one under new terms, and get an additional lump sum of cash in the process. This cash can help you consolidate debt, remodel your home, make a large purchase, or even buy another property.
Essentially, it is taking out a new loan for more than your current mortgage balance. The new loan replaces your existing loan and you receive the difference between your old loan and your new loan (minus any applicable costs) in cash.
With conventional or FHA loans, you are typically able to borrow up to 80% of your home’s value. For VA loans it can be up to 100%.
How can I use the money I get from a cash-0ut refinance?
Pay off high-interest debt and debt consolidation
Personal loans and credit card debt are high-interest liabilities that can quickly balloon to unmanageable levels. Under the right circumstances, paying these debts off with a cash-out refinance can alleviate the immediate financial crunch. Other liabilities, like car loans, typically have higher interest and would make sense to pay off with a cash-out refinance.
Large purchases
Paying for things like college tuition or a wedding can be difficult. With a cash-out refinance, you may be able to cover some of these expenses at a lower interest rate than you would with personal loans or credit cards.
Home improvements and repairs
One of the most common reasons for securing a cash-out refinance is for home improvements, upgrades, and repairs. When done right, updating key areas of your home, such as the bathroom or kitchen, will often increase its value, thereby increasing your equity. In this situation, the refinance could pay for itself. Additionally, if you use the cash to improve your home you may be able to deduct additional interest payments from your taxes.
Advantages of a cash-out refinance
Better rates
If interest rates drop or your financial situation has improved, you could qualify for better rates and terms with a cash-out refinance.
Lower monthly output
Homeowners who use a cash-out refinance for debt consolidation can end up lowering their overall monthly payments. And lower interest rates and a better financial situation may lead to a lower mortgage payment, relieving some financial pressure.
More cash-on-hand
Cash-out refinances provide the cash you need for whatever you need. Maybe you want to save for college or retirement, do home renovations or buy that big-ticket item you’ve been thinking about.
Disadvantages of a cash-out refinance
Too much debt
Sometimes life circumstances work against homeowners after a cash-out refinance. You risk accumulating debt you can’t afford in the future as well as put your home at risk.
Higher payment
It’s possible your cash-out refinance results in higher payments than your previous mortgage. You need to make sure the terms of the loan align with your budget.
What is the difference between a cash-out and rate-and-term refinance?
There are two basic types of mortgage refinancing: cash-out and rate-and-term.
While a cash-out refinance means getting a larger loan than what you currently owe, a rate-and-term refinance replaces your existing mortgage with a new one with different terms (keeping your equity the same).
A rate-and-term refinance makes sense for homeowners who wish to lower their monthly payments (by getting a lower interest rate) or for those who wish to change their loan term, going from 30 to 15 years, for example.
Is a cash-out refinance right for you?
If you are a homeowner and are concerned about your financial situation, have home repairs or investments you are considering, or you would just like to reduce your monthly expenses, there is a good chance you will benefit by accessing your home equity through a cash-out refinance.
If you would like to learn more about the options available to you to access your home equity via a cash-out refinance, or would simply like to find out how much equity you have in your home, fill out the form below to request a refinance consultation with one of our mortgage advisors.
