Are you looking to get cash from the equity in your home? We suggest a cash out refinance.
Need cash to make improvements on your home or pay off debt? A cash out refinance on your home may be the perfect solution.
What Is a Cash Out Refinance?
A cash out refinance is a refinance of an existing mortgage. The new mortgage loan is for a larger amount than the existing loan, and the borrower retains the difference in cash between the two loans. Most borrowers cash-out so they can acquire the equity they’ve built up in their home in the form of cash.
Here is a great example: The borrower owns a $325,000 house but still owe $225,000 on the current mortgage. The borrower now holds $100,000 in equity of ownership in their home. The borrower decides they need $50,000 for a home improvement project. A cash-out refinance mortgage could allow them to get the funds for their project. When the borrower has the new loan in place the new loan now totals of $275,000. The $50,000 is added to the base amount owed on the original mortgage of $225,000 and a new mortgage is created for $275,000.
What are the costs of a Cash-Out Refinance?
Like most any mortgage a cash out refinance costs are similar to purchases but more like rate term refinancing of your home’s mortgage. The borrower pays closing costs. These costs must be accounted for and can reach to the level of thousands of dollars. Additionally, the borrower pays interest on the cash that you get out the newly created mortgage total. You can use an amortization calculator to see how much this will cost over the life of the loan.
Uses of the Cash out refinance
A borrower can use the cash from a cash-out refinance on most anything, like paying down your credit card debt or taking a vacation. Spending money on projects that add value to a home are typically a better investment of one’s money.
Credit cards with high interest are sometimes a great way to help your household cash flow and minimize high interest debt. There are calculators that can help you decide if a cash-out refi with all of your costs of doing this mortgage are in your best interest. Typically the interest you pay for your credit card is considerably higher than the interest on your new mortgage loan. Just don’t forget that you are spreading the lower interest over 15-30 years when creating the new loan.
Some of the other positives for this loan are paying down high interest debt which can boost your credit score. Also, borrowers get a tax benefit from moving the credit card debt to mortgage debt. This provides the ability to deduct mortgage interest on your taxes.
Adding value to your home with the cash will allow borrowers to use this money to do home improvements. Adding bedrooms, bathrooms and square footage to a home can increase the value of your investment and this can justify the additional mortgage loan amount. Just make sure that you can afford the additional cost of increasing your original loan amount. Our loan officers can help you with your new loan estimates so you can feel comfortable with your new mortgage loan.
Are there restrictions of a Cash Out Refinance?
Refinancing mortgages when taking out cash have more limitations than rate term and purchase loans. Some limits include: Borrowers are required to have a higher minimum credit score also, the borrower should have owned their home for at least a year. Finally the new loan will have loan-to-value ratios stricter than other mortgages. Most conventional loans require a minimum of 85% LTV. It is smart to shoot for 80% LTV to avoid mortgage insurance that is associated with lover LTV’s.
Important considerations for Cash-out refinance:
Cash-out refinance can improve your current situation if you get a good interest rate. The borrower needs to make sure that they can pay back the new loan, and first consider home improvements or paying down high-interest debt.
Like any mortgage debt you need to pay off this loan in full and make your new payments on time. You don’t want to lose the home to default. Let your mortgage loan officer help you with your loan calculations. We help to ensure that the new loan will not be a financial burden with your cash flow situation.