Cash-Out Refinancing: Is It Right For You?
Cashing out home equity can help you access funds to help renovate your home & much more.
Cash-out refinancing is a great way for you to use the equity in your home to remodel, consolidate debt, get a downpayment for another home, or reach other financial goals. As of August 2021, the average homeowner in the US has $153,000 in tappable home equity!
Let's get into what cash-out refinancing is, how it works, and how it can help you.
What Is Cash-Out Refinancing & How Does It Work?
Cash-out refinancing takes your current home loan and replaces it with a bigger mortgage. This allows you to access the equity you’ve built up in your home and use the difference between the two mortgages in the form of cash.
A cash-out refinance works similarly to a rate and term refinance of a mortgage. A rate and term refinance simply replaces an existing loan with a new one for the same amount, typically at a lower interest rate or for a shorter term.
With a cash-out refinance, you are taking out a new mortgage (hopefully at a lower rate) & taking out a lump sum of your home’s equity. Typically, you tend to pay more in interest from the duration of the loan because you are increasing the loan amount & you will need to pay closing costs.
This type of refinancing is most beneficial when you are able to get a lower interest rate & you use the cash-out funds on things like improving your property value or investing.
Example of how a cash-out refinance works
In this example, let’s say that the current balance on your mortgage is $300,000 but your home is worth $500,000 - you have $200,000 in equity. Typically, lenders require you to keep at least 20% of your home equity after a refinance, so you’ll need to keep $100,000 in equity. This means you would be able to borrow up to $100,000 in cash!*
*In a cash-out refinance, homeowners have to pay for closing costs so the cash-out could be less.
What Can You Use Cash-Out Refinance Money For?
With a cash-out refinance, you can use the money for any goal. Typically homeowners use funds for things like:
- Home renovations: A new kitchen, finishing a basement, redoing a master bedroom
- Investments: such as an investment property, retirement accounts, other investment opportunities
- Education: College is expensive, using home equity can help alleviate some of that financial burden
- Debt consolidation: Interest rates on mortgages are often lower than credit cards and other personal loans
- Christmas presents
Pros & Cons Of A Cash-Out Refinance
Like any financial decision, there are pros and cons that homeowners must weigh.
- Potential for a lowered interest rate: Depending on credit and other factors, borrows could lower their interest rate on a new loan.
- Interest rates are typically lower than personal loans: Personal loans and credit cards typically have higher interest rates than Cash-Out Refinance loans.
- Leverage Tax Deductions: If a homeowner uses their Cash-Out Refinance for home improvement, they could take advantage of the interest tax deduction.
- Lump-sum of cash: Having money on hand is beneficial to help you grow your wealth if used toward investment opportunities.
- Potential for a higher interest rate: Depending on credit and other factors, your mortgage interest rate could be higher.
- Closing costs: Similar to buying a property the first time, borrowers will have to pay closing costs like appraisal fees.
- Private Morgage Insurance: Depending on how much equity is cashed out, borrowers may be required to pay Private Morgage Insurance.
As a homeowner, there are options to access your home’s equity such as a Home Equity Line, Reverse Mortgage, or a HELOC. All of which have their pros and cons. When deciding if you should refinance or utilize a cash-out refinance, It is important to do the math and work with a professional to make sure you are making the best financial decision for your situation.
RanLIfe Home Loans is here to help. Simply fill out the form below and one of our amazing loan officers will make sure you are taken care of.