A cash-out refinance is process of replacing your current home loan with a fresh mortgage that is higher than the outstanding loan balance on your home. The difference between the new mortgage and your current mortgage can then be withdrawn in cash. The cash is then put towards debt consolidation, home remodeling, or any other financial goals.
How It Works
Traditional refinancing works by replacing a current loan with a new one, usually for the same amount and at a shorter loan term or lower interest rate. Sometimes people do both!
On the other hand, we have cash-out refinancing. In this instance, you are withdrawing a portion of your home’s equity in a lump sum of cash. Your interest rate will increase when you perform a cash-out refinance, as the loan amount is increasing.
The amount that you can withdraw on a cash-out refinance is typically limited to about 80-90% of the value of your home. This is for assurance that you will maintain a comfortable cushion of equity.
When To Use a Cash-Out Refinance
There are tons of advantages of cash-out refinances, especially if you are in need of a large sum of money. Here are some of the top reasons that one might consider a cash-out refinance:
- Adding Value To Your Home: People often use the cash they withdraw to make improvements or repairs to their home. These types of projects can provide homeowners with tax deductions as well. You may be able to deduct the interest rate from your taxes.
- Tapping Into Home Equity: Tapping into your home equity could potentially be less expensive than getting a home equity loan, credit card, or personal loan.
- Debt-Consolidation: Debt-consolidation is another major reason that people opt for cash-out refinancing. You can consolidate and pay off high-interest debt, though it is important to do the math to make sure everything checks out.
When Not To Use a Cash-Out Refinance
Sometimes cash-out refinancing is not the answer. Here are some of the top reasons you should avoid a cash-out refinance:
- It Increases Your Existing Mortgage Rate: If cash-out refinancing will increase your rate by significant amount, it may not be the best choice.
- It May Reestablish Private Mortgage Insurance: You might have to pay private mortgage insurance (PMI) after you have already canceled it when you withdraw cash from your home’s equity. This can add to your borrowing costs overall.
- Heightens the Risk of Foreclosure: If you are unable to pay your loan after a cash-out refinance, you could risk losing your home to foreclosure. Always make sure to only take out the cash that you need.
We’re Here To Help!
The refinancing process can be quite daunting and confusing, especially for those who are new to the game.
Here at NESWork, we’re all about providing our clients and customers with oversight throughout the entire mortgage refinancing process.
If you’re looking to make sure that a cash-out refinance is right for you, then make sure to get in contact with us here!