Cash Out Refinance
You have put money, time, and energy into your home—resulting in an increase in your home equity. Additionally, in many places, property values have increased based simply on the market conditions. Did you know that you could use your home’s equity now? With a cash out refinance you can take advantage of your established equity and turn it into cash.
Here is an example of how it works:
You are looking for $10,000 cash and considering a cash out refinance.
You bought a home for $105,000 and you have paid off $15,000. This means that you still owe $90,000 on your home.
Additionally, home values have increased in your area and your home is now worth $118,000.
You refinance your mortgage for $100,000; the balance of what you owe plus the cash you would receive.
Note: Your circumstances may allow you to refinance up to the full value of the home. Using this example, that would be a $28,000 cash-out.
Unlike a second mortgage, new credit card, or personal loan which adds another monthly payment to your list of bills, a cash-out refinance will not. Instead, you are refinancing to a new mortgage on your home. With a cash out refinance, you could do anything that you want with the money you take from your home’s equity.
Benefits of a Cash Out Refinance
There are a variety of ways people are using a cash out refinance to benefit their financial future.
Home Renovations or Repairs
Buying a home is one of the biggest investments someone will make in their lifetime and likely they will want to make their home as comfortable and up to date as possible. But sometimes it is hard to build up the needed funds to complete home renovations and repairs. A cash out refinance could be the solution. Instead of relying on high interest credit cards or a personal loan, a cash out refinance helps you use the money you have already paid into your mortgage to cover repair costs.
Pay Down High Interest Debt
Given the incredibly low mortgage interest rates we are currently experiencing. You could pay off high interest rate credit cards and save yourself thousands of dollars you would have spent in interest. This option may not make sense for everyone but if a customer is truly committed to paying down debt, then utilizing a cash out refinance and taking on the debt at a lower interest rate can be a smart solution.
Increase Investment Opportunities
Taking into account the power of compounding interest, it is possible to receive a higher return on your investment by freeing up the money you have tied to your home and putting it towards a retirement fund or other investment.
Cover a Large Expense
Unlike a second mortgage, new credit card, or personal loan which adds another monthly payment to your list of bills, a cash-out refinance will not. Often the mortgage interest rates are lower than you may find for credit cards or personal loans.
Things to Consider with a Cash Out Refinance
Keep in mind that there is a cost to refinance, however, in a scenario of a cash-out refinance these costs may be less than other financing options. Still it is smart to consider how much longer you plan to be in your current home and what your break-even point is. Not sure what your break-even point is? A mortgage banker can help you calculate this.
Additionally, it is important to note that you don’t get your cash immediately, the process of a cash out refinance is just like any other refinance. Your loan will need to be reviewed through underwriting and the appraisal process before being able to close on the new mortgage. If you are looking for immediate cash, this may not be the best option for you.
If you would like some help in crunching numbers in different loan scenarios, we are here for you. After all, that is what we do every day—get in touch with a mortgage banker in your area or send us a message on our website chat. However, if you aren’t quite ready to talk you can find more information on how refinances work and other helpful tips in our refinancing guide.
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