If you’ve been asking yourself whether a cash-out refi or a home equity loan is a better option for you, read on to inform your decision-making process.
How Does Cash-Out Refinancing Work?
When you apply for a cash-out mortgage refinance, you’re trying to convert a portion of your home equity into usable cash. For example, imagine that your home has been appraised for $375,000 and you took out a $300,000 loan when purchased. You have since paid down $200,000 of that and now owe $100,000. In this scenario, you would currently have $275,000 in equity. We can lend up to 80% of your appraised value.
What if in addition to your mortgage, you have a $15,000 medical bill accruing at double the interest that your home loan is accruing? You can apply for a cash-out refinance loan as a cost-efficient alternative to pay off the medical bill with a lower interest rate.
How Much Can I Cash-Out Refinance?
How much you can refinance depends on a few things. One of the biggest components to determining the amount of a cash-out refinance is how much of your home you currently own. To qualify for a cash-out refinance, you need at least 30% home equity. However, the more stake you have invested in your home, the more cash you’re entitled to.
The other key component that determines how much money you’re eligible to borrow is the loan to value ratio (LTV) on your home. The LTV is essentially a refinance calculator. The maximum LTV for a cash-out refinance loan is 80%. For example, if your property has an appraised value of $400,000 and you currently have a loan balance of $200,000 (50% LTV), you are eligible for 80% of the $400,000 appraised value, or up to $320,000. This means that you can take $120,000 ($320,000 – $200,000) home from the cash-out refinance.
Note* The loan to value ratio also accounts for how much your property value has diminished over the years.
Benefits of Cash-Out Refinance
When you borrow money, you must consider who you’re borrowing it from. This principle comes in handy while you’re thinking about whether or not a cash-out refinance is your best option. There are many benefits to this kind of refinancing, one of which is gaining value from the money you’re borrowing.
When you repay a mortgage, you gradually gain equity in your home. With credit card debt, you’re usually spending on frivolous material possessions. With a cash-out refi, you’re doubling down on your plans for the future.
Debt Consolidation and Credit Relief
A cash-out refinance is beneficial for individuals who are looking for an effective method to consolidate debt. It affords people the opportunity to use their home equity as leverage against outstanding debt and improve their credit score.
Interest rates are usually higher for credit cards than mortgages. To illustrate this point, one need only compare the national average for both in 2018. The national average interest rate for credit cards was 15.32%. Compare that to the national interest rate on home mortgages, which was 4.58%, and you can see why a cash-out refinance is a suitable solution to miscellaneous debt.
Lower Your Mortgage Rate
In the current real estate market, mortgage interest rates are favorably low. If you received your mortgage when rates were high, now is a great time to refinance. You may be able to lower your mortgage rate while receiving cash.
Once A Cash Out, Always A Cash Out?
Some people are concerned about getting a cash-out refi because of how it used to work. In the past, once you borrowed with a cash out, it created a ‘cloud’ on your title. This caused a slightly higher rate. If you tried to later refi again, the cloud remained. Fortunately, this is no longer the case. A cash out refi can be later refinanced with no automatic penalty.
Current rates are favorable for most borrowers. If you have taken out a cash out refi in the past, give us a call to discuss your options for refinancing. If you were told ‘once a cash out always a cash out’ in the past, this is no longer the case.
Things to Consider When You’re Deciding on Cash-Out Refinancing
Replacing Debt with Debt
As with any other financial decision, a cash-out refinance should not be taken lightly. This kind of refinancing is secured debt. This means that you’re placing your own assets on the line (equity in your home). With unsecured debt, the bank can’t foreclose your house. If you default on a cash-out refinance, they can.
That’s not to say that you should abandon the idea of a cash-out refinance. Refinanced mortgage rates are lower than credit card APR rates and less damaging than medical bills sent to collections. However, it’s important to make sure that your income is secure and you don’t incur any additional miscellaneous debt. Taking on debt to pay off debt is always risky, but if you prepare for it efficiently, it can save you a considerable amount of money.
Home Improvements and the Value of Your Home
Refinancing is a great way to improve your property value. If you’re planning on retiring and moving in the future, it can give you the assets necessary to do so. Home improvements can also ensure that you’re getting more out of the financial investment that you put in. Since you’ll be investing in something that you already partially own, you’re mitigating some of the risk factors. The bottom line: investing in your assets and your future is never ill advised.
Be Mindful of Who You Borrow From
Lenders can offer usurious mortgage rates if they aren’t kept in check by borrowers. The saying, “Buyers beware,” applies to borrowers as well. Consult online publications and reviews to gain a deeper understanding of who you’re borrowing from. Like any loan, this type of refinancing is only ideal when you’re comfortable with the risks you’re taking. Who you borrow from should reinforce your comfort.
A Cash-Out Refinance Mortgage Offers You Options
If your mortgage rate is too high and out of date, you’re looking to invest in your home and improve its value, or you have an outstanding debt with an exorbitant APR, refinancing might be your best option. However, it’s important to avoid rushing when it comes to loans of this size. Take your time, do your research, and apply for loans responsibly.