What is a Cash-Out Refinance?
Cash-out refinancing is a powerful financial tool that enables homeowners to tap into their home’s equity to use towards Home Improvements and/or Consolidating Debt. A cash out refinance can be a wonderful choice for you if you currently have high interest debt, would like to lower your total monthly payments, or your house needs some work.
Let’s go through some basic information on how a cash out refinance could help you achieve your goals, and potentially improve your current finances!
How Does a Cash Out Refinance Work?
Refinances in general have the same process as a purchase mortgage, with the exception of potentially receiving cash back at closing, and/or having your debts paid off. Your new loan is used to pay off your current first lien, and any other HELOC’s or second liens you have on your home. The refinance process is detailed later in this article.
Reasons to Consider a Cash Out Refinance
There are several reasons why homeowners might consider a cash-out refinance. Some of the most common reasons include:
A cash out refinance might give you the money you need to add a new room, remodel the kitchen, or improve your landscape, among other major home improvements. These upgrades can raise the value of your property, turning it into an investment in your future.
You can reduce your monthly expenses and save money on interest by consolidating high-interest debt including credit card balances, auto loans, and personal loans via a cash out refinance. Even better, you might be able to shorten the length of your loan without increasing your overall monthly payments.
Pay for Education Expenses
A cash-out refinance might be a helpful source of funding if you or your kids need money to pay for school-related costs like tuition, books, or other living expenses.
Unexpected expenses, such as medical bills or car repairs, can be stressful. A cash-out refinance can provide a financial safety net to cover these costs.
Have high interest debt and want to consolidate it?
Start your application for a Cash out Refinance and use your equity to consolidate debt, and reduce your total monthly expenses.
Cash-Out Refinance vs. Home Equity Loan
When deciding between a cash-out refinance and a home equity loan (HELOC), it’s crucial to consider the differences between the two:
- Interest Rates: Because cash out refinances are secured by a primary mortgage, they frequently have lower interest rates than home equity loans. Second mortgages, which are frequently used for home equity loans, have higher interest rates as a result of the higher risk to the lender.
- Loan Terms: With a cash out refinance, your current mortgage is replaced with a new one, potentially extending the loan duration. Home equity loans have their own payback periods, which are typically between 5 and 15 years, and are distinct from your first mortgage.
- Closing Costs: Compared to home equity loans, cash-out refinances often have higher closing costs. The lower interest rate, though, might eventually make up for the increased prices.
- Tax Implications: The interest paid on both cash-out refinances and home equity loans may be tax-deductible if the funds are used for home improvements or other qualifying expenses.
How to Qualify for a Cash-Out Refinance
To qualify for a cash-out refinance, you need to meet certain requirements:
- Equity: Before you may be eligible for a cash out refinance, lenders typically demand that you have at least 20% equity in your house. This makes sure that your house has enough worth to support the new loan. Depending on the kind of loan you already have and the kind of loan you’re asking for, there are several exceptions to this rule including a VA Cash Out Refinance.
- Credit Score: To get favorable interest rates and loan terms, you need a credit score that is strong (often 620 or higher). Your chances of being approved are better the higher your credit score.
- Debt-to-Income Ratio: Your debt-to-income (DTI) ratio, which compares your monthly debt payments to your gross monthly income, will be evaluated by lenders. For a cash-out refinance, a DTI ratio of 50% or less is normally necessary, though it may be higher on some loan types.
- Stable Employment History: Borrowers with a consistent employment history—typically at least two years spent with the same employer or in the same sector of the economy—are preferred by lenders.
Determine how much cash you will need to reach your goals
Determine how much you will need so that you can tell your lender whether you are making home improvements, consolidating debt, or building an emergency fund. Before submitting your loan application, total up all the debts you wish to combine, the expected cost of all home upgrades, and/or the sum of money you wish to set away for emergencies.
Choose the Right Lender
Securing the best loan terms and interest rates requires selecting the appropriate lender for your cash-out refinance. When choosing a lender, keep the following things in mind:
- Reputation: Research each lender’s reputation by reading customer reviews and consulting with friends, family, or colleagues who have experience with the lender.Check out our awesome Customer Reviews on Google!
- Loan Products: Look for a lender that offers a wide variety of loan products to ensure you find the right fit for your financial situation.
- Interest Rates: Compare interest rates from multiple lenders to secure the most competitive rate for your cash-out refinance.
- Customer Service: Choose a lender with responsive customer service and a dedicated loan officer to guide you through the application and closing process.
Frequently Asked Questions About Cash-Out Refinances
A cash-out refinance can be beneficial for consolidating debt, lowering monthly payments, covering emergencies, or making home upgrades.
The amount you can borrow in a cash-out refinance depends on your home’s value, mortgage balance, and lender’s criteria. Typically, lenders limit borrowing to 80% of your property’s value.
Interest rates for cash-out refinances vary based on your credit score, loan-to-value ratio, and market conditions. Higher credit scores and lower LTV ratios generally lead to lower interest rates.
Closing costs for a cash-out refinance typically range from 2-5% of the loan amount, including fees for title insurance, origination, and appraisal. These costs are often covered by the new loan, not needing upfront payment.
The interest paid on a cash-out refinance may be tax-deductible if used for qualifying expenses. However, the Tax Cuts and Jobs Act of 2017 imposed new limits on such deductions. Consult a tax professional for guidance specific to your situation.
The cash-out refinance process can take anywhere from 30-45 days, depending on the lender and the complexity of your financial situation. To expedite the process, be prepared to provide all required documentation promptly and respond to any requests from your lender.
A cash-out refinance replaces your existing mortgage with a new one, while a home equity loan is an additional loan on top of your mortgage. They differ in interest rates, loan terms, and tax implications.
Yes, cash-out refinances can be used to pay off high-interest debts like credit card balances and auto loans. This could lead to savings on interest payments and a simplified monthly budget.
Wrapping it up: Is a Cash-Out Refinance a Good Option?
Cash-out refinancing can be a powerful financial tool for homeowners looking to unlock their home’s equity for home improvements, reduce their total monthly payments, or have some reserves in case of emergencies. By understanding the process, and carefully selecting a lender, you can ensure that a cash-out refinance is the right decision for you. Always consult with a financial professional before making any major financial decisions, and take the time to research and understand your options fully.