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There is a special type of mortgage loan that allows homeowners to refinance their home loan while also cashing out some of their home equity. It is known as a “cash-out refinance” loan and it may be a great solution if you need to borrow the money for other important uses. This loan program is not the right answer for everyone. You’ll want to understand how cash-out refinancing works and if the benefits will make it the best option for you.
Here Are 3 Key Benefits Of A Cash-Out Mortgage Refinance:
- Cash for Important Expenses
There is no real reason to pursue a cash-out refinance if you don’t really need the money. You are much better off keeping the equity in your real estate and continuing to let it grow over time. A cash-out refinance is generally only worthwhile if you are putting the money to good use. Homeowners may use this cash to invest back into their homes with upgrades, renovations and other home improvement expenditures. This can be smart if the investments help rebuild the equity you are borrowing and increase the potential resale value of the property.
You may also consider a cash-out refinance to pay off other outstanding bills or high-interest debts, such as credit card balances, car loans, student loans, personal loans and medical bills. Odds are that the new mortgage loan will be at a lower interest rate than those other high-interest loans, so it may allow you to pay everything off sooner by borrowing some of your home equity.
Other homeowners may use the money for things like paying for children’s college expenses or to help a family member in need. Just make sure the cash is going to a worthwhile cause before considering a cash-out refinance. Remember that it is a new loan and you are increasing your mortgage principal amount, so don’t borrow extra if you don’t need it!
- Lower Mortgage Rate
If you have strong credit and better financial standing, you may be able to qualify for a lower mortgage rate than you are currently paying. Many homeowners are in healthier financial situations than when they first got their original mortgage loans. Better employment/income, higher FICO scores, lower existing debts, current mortgage payments, etc.—these are all factors that can help you lock in a lower interest rate on your new mortgage.
In addition, a cash-out mortgage refinance allows you to use your home equity as collateral for the new loan. You are borrowing from money you’ve already earned during your time as a homeowner while the property’s value has increased and you have paid down the principal of your first loan. Your equity will provide excellent leverage that a mortgage lender can use to get you the lowest possible mortgage rate.
Because you are borrowing more and adding to your principal, your monthly mortgage payments could go up or stay about the same. They could be even lower. It will depend on your new mortgage rate, how much you still owe, how much equity you cash out and the payoff time frame of your new loan. Some borrowers may opt to start a new 30-year mortgage while others may be able to reduce the payoff period to 10 or 15 years—while still cashing out some equity and keeping the monthly mortgage payments affordable.
- Financial Assistance
Whether you are using the cash from your home equity to pay off other debts or you are investing it back into your family or home, a cash-out refinance may provide some valuable financial assistance exactly when you need it. Not every borrower will be able to qualify for cash-out refinancing and it’s not a good solution for everyone. Have a solid plan for how you intend to use the money you are cashing out and make sure you can handle the new monthly mortgage payments. You are essentially borrowing from yourself, so understand what you are getting into and how the loan is repaid.
Talk with your mortgage lender or mortgage broker to see if cash-out refinancing is a viable option for you. You may also want to look into a home equity line of credit (HELOC) as an alternative for home improvement investments. That could allow you to borrow what you need when you need it rather than one big lump sum cash-out. The rates may be a bit higher for a HELOC, though. The point is to explore all your options and see what will work best for you.
To learn more about cash-out refinancing or to get started with your loan application in the Atlanta area, contact Moreira Team | MortgageRight today.