More and more homeowners are looking into cash-out refinancing as an effective financial solution. This special type of mortgage loan allows you to borrow money from your own property by using your home equity as collateral. You may be able to refinance your mortgage loan at a lower mortgage rate while also cashing out some of your home equity to use for other important living expenses.
Inflation has hit some homeowners hard. However, the good news is that home prices have gone up dramatically fast in recent years. Someone who bought a home just a few years ago may be sitting on a great deal of equity as the house is worth much more than the original purchase price. For those who have kept up with their mortgage payments, the equity is even greater. You’ve been paying down your loan principal while the property value has gone up. The longer you’ve owned your home, the more equity you have likely gained.
What is Home Equity?
Home equity is the current real-market value of your property minus what you still owe on your mortgage loan. If you owe $200,000 in principal on your home loan and your house is currently worth $400,000 in today’s market, then you are sitting on $200,000 of equity. This gives you plenty of leverage and a number of options on how you can take advantage of this gain.
Here are a few options to consider:
Sell Your Home—You can sell your house while property values are up. You can then take all the proceeds from the sale and apply the funds toward your next home purchase. You would pay off your remaining mortgage principal and then the rest (the equity) could be used as an excellent down payment on your new home. This high down payment will give you more buying power and help you qualify for a lower mortgage rate.
Refinance Your Home Loan—Your home equity helps put you in a better financial position overall. If your income, credit score and/or debt situations have also improved since your original purchase, then you may be able to qualify for a lower mortgage interest rate. Or, you can pay roughly the same rate and shorten the remaining term of your loan. For example, you may have 20 years left on your original mortgage loan. Now, you may be able to keep your monthly payments similar while moving to a 10-year or 15-year loan term.
Cash-Out Refinance—If you need to cash out some of your home equity, ask your mortgage lender about a cash-out refinance loan. This option allows you to refinance your current home loan while also cashing out money that you can use for other expenses. Perhaps you have some unexpected medical bills, or you have family college expenses. Maybe you want to pay off/down some of your other high-interest debts like credit cards, car loans, student loans or personal loans. Another great idea is to reinvest some of your equity back into your home. Make some repairs and renovations that will increase its value even more when it is time to sell.
Home Equity Line of Credit (HELOC)—If you don’t qualify for a lower mortgage rate or don’t need to cash out everything at once, you can consider a home equity line of credit. A HELOC allows you to take out money when you need it. This is a very popular solution for home improvement investments. A good mortgage broker or lender will help you decide if a HELOC or cash-out refinancing is the better option based on your financial situation and your cash needs.
How Much Cash Should I Take Out?
The general rule of thumb is that you should never borrow more than you need. This is a smart plan to follow if considering a cash-out refinance loan. Don’t take out a bunch of cash if you don’t really need it. Keep as much equity in your home as you can, so it is worth as much as possible if and when you sell it in the future. Cash out as much as you need to cover important expenses. Remember, you are borrowing the cash from your own home equity—in other words, you are borrowing from yourself. Don’t cash it out for frivolous expenditures.
How much cash you are able to take out will depend on how much equity you have based on a current property appraisal and your loan eligibility standards. You may not qualify for a cash-out refinance loan if you don’t have enough equity or your financial standing is weak. Your mortgage lender will review a number of factors to determine your loan eligibility, mortgage rate and how much cash can be borrowed.
To learn more about cash-out refinancing programs in Atlanta or to explore other home financing and lending solutions, contact Moreira Team | MortgageRight today.