Cash-Out Refinance Options Explained
If you commit to a cash-out refinance, this sees you getting a new home loan to replace your existing one. This new loan will be for a larger sum than your original home loan was for. The difference between these two loan sizes will be given to you in the form of cash. This is often then used in order to consolidate debt, make improvements to your home, or for other types of financial needs. In order to be able to get a cash-out mortgage to refinance, you will need to have already built up some equity in your home.
Cash-out refinancing is different from regular refinancing. The latter sees you replacing your mortgage loan with a new one that has the same balance, but with a lower interest rate. There is usually a limit on how much you will be able to cash-out from your home. Normally, you will be able to get between 80% and 90% of the total home equity.
As an example of a cash-out refi, if you have a home valuation of $250,000 if the balance of your mortgage is $150,000, then the equity you have in the house is $150,000. You can refinance the $150,000 loan balance for $200,000, getting $50,000 of this sum in the form of cash.
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Cash-Out Refinance Pros & Cons
There are a few core pros and cons associated with cash-out refinancing that you should be aware of before you commit to this type of financing option.
- Better Interest Rates – You will often be able to get a cash-out refinance rate that is lower than the rate that you have been paying on your existing home loan. The interest rate at the time of buying your house might be much greater than the current interest rates. Therefore, you can save money over time when paying interest on your debt.
- Consolidating Debt – A lot of people you commit to cash-out refinance will use the resulting cash to pay off high-interest credit card debt. This allows them to save significant money in the form of interest.
- Credit Boost – There are ways in which cash-out refinancing might boost your credit score. This is because you might use the cash to pay off existing debt, leading to your total credit utilization ratio dropping.
- Lower Borrowing Costs – Getting cash through the use of cash-out refinance might carry a lower interest rate than using other forms of credit for financing purposes, such as a personal loan or a credit card.
- Risk of Foreclosure – Borrowing money based on your home is a form of secured debt, as your home is on the line as collateral. If you fail to meet your repayments over time, then there is the risk that you will lose your home.
- Costs – There will usually be some costs to consider when you commit to cash-out refinance. There are usually closing costs involved that could be between 2% and 5% of the total mortgage size. This can be a significant cost.
- Extended Payments – As you are borrowing money based on your home, you will be making mortgage repayments for a lot longer than you would be if you did not go down the cash-out refinance route. The total cost will also be higher when interest payments are taken into account.
Is Cash-Out Refinance Suitable for Your Needs?
There are certain types of people who might be suitable for cash-out refinance, while other people should look at other options to get cash. Cash-out refinance can be a very cheap way to borrow money because you are using your home as collateral. Naturally, the risk is much greater if you subsequently are unable to meet your repayments. Therefore, if you have any concerns that you might not be able to consistently meet these obligations, then you should look at getting a different form of financing.
Cash-out refinancing can be a great fit for people who are looking to fund home improvement work. This is because you are able to get a tax deduction through your mortgage interest when you boost the overall value of your home through this work.
Some people who are looking to buy an investment property will often use cash-out refinance, while it can also be suitable for consolidating high-interest loans. This is because the cash-out refi rates are usually lower than the likes of credit cards. Therefore, you can consolidate your debt and pay off your obligations at a lower monthly cost.
Another popular use case for cash-out refinance is getting funds for your kid’s college education. Once again, the cash-out refinance rates will usually be a lot lower than the rates associated with student loans.
Finding the Best Cash-Out Refinance Lenders
There are many great options on the market today if you are looking for cash-out refinancing. You can choose between physical and online lenders. If you go with a physical lender, you will need to often visit a branch in pros and comply with the relevant procedures in order to secure cash-out refinance. It can be more difficult shopping around and comparing the different lenders if you are physically going from lender to lender.
A lot of people these days prefer going down the online lender route. This is because you can quickly assess all of the different available options. The application processes are often faster and more efficient, limiting the need for you to visit a branch in person. The rates that you can get online will often be more competitive and the entry requirements will often not be as stringent.
Cash-Out Refinance Alternatives
If you decide to not go down the route of cash-out refinance, then there are a couple of other ways that you can leverage your home mortgage in order to get access to cash. Here are a couple of the alternative options:
Home Equity Loan
A home equity loan is often known as a second mortgage. It is usually preferable for paying bigger expenses, such as debt consolidation or home improvements. The amount of money that you can borrow through a home equity loan depends on how much money you have paid to date off your existing mortgage loan.
Home Equity Line of Credit (HELOC)
A HELOC is like a credit card as you get access to a revolving line of credit. You are able to use a HELOC to borrow money up to a specific amount. HELOCs will carry variable interest rates and there will not be fixed payments.