How Does a Cash-Out Refinance Loan Work?

Cash-out refinance is an excellent financial solution for homeowners who meet the following criteria:

            • Current on mortgage payments

            • Have an ample amount of home equity

            • Have a strong financial standing (good credit score, steady income, etc.)

            • Need money for other important expenses

If this sounds like you, then you will want to talk with your mortgage lender and ask about refinancing your existing mortgage with a cash-out refinance loan. This special type of mortgage loan allows you to refinance your current mortgage loan at a lower interest rate. At the same time, you will be able to tap into your equity and borrow cash. This money can be utilized for whatever other financial needs you have.

Why Should I Cash Out My Home Equity?

This is a very important question to ask yourself. If you don’t need the money for anything really important, then don’t apply for cash-out refinancing. Look for standard refi options that can allow you to refinance at a lower mortgage rate, which could reduce your monthly mortgage payments and/or shorten the remaining payoff term of your loan.

Otherwise, here are a few common financial needs that may inspire a homeowner to consider cash-out refinancing:

            • Paying off other high-interest debts (credit cards, car loans, student loans, etc.)

            • Paying off unexpected medical bills

            • Paying for college and educational expenses

            • Investing in home improvements

            • Other important personal/family expenses

The key word here is “important.” This isn’t free money and you don’t want to be frivolous with it. You are essentially borrowing from yourself, using your home equity as loan collateral. If you don’t need the cash now, then leave the equity in your property and let it keep growing until you are ready to sell.

How Does Cash-Out Refinancing Work?

If a cash-out refinance loan sounds like a good solution for you, then you should know how it works before applying. A trustworthy mortgage lender will be able to walk you through the finer details of the process, but we will cover some key points here.

Cash-out refinancing means you are refinancing your current mortgage loan while borrowing cash from your home equity. The two amounts (existing principal balance and cash taken out) will be added together to form your new loan principal balance. Let’s say you still owe $200,000 on your home loan and you borrow $50,000 of equity. Your new loan will be $250,000. Your new monthly payments will be based on your qualified interest rate and the length of the loan term. Your monthly payment amount may go up or down based on these factors.

The main benefits of cash-out refinancing are the ability to refinance your existing loan (ideally at a lower mortgage rate than you are currently paying) and obviously the cash you can take out of your home equity. You can pay off other debts or invest money back into your home to help grow your equity even more in the future.

How Do I Apply for a Cash-Out Refinance Mortgage Loan?

The first step is to contact a local mortgage lender who offers cash-out refinancing. Not all lenders provide this lending solution. You will submit a loan application and your current financial documentation (bank statements, existing debts, tax returns, etc.) just like you did with your original mortgage loan. The lender will run a credit check to determine your FICO score. They will also order a home appraisal from a licensed third-party provider. This will be required to determine your current home equity and how much you can actually cash out.

If everything checks out, your mortgage lender will approve your refinance loan and the cash will be wired to your account as soon as the loan is funded. With a standard cash-out refinance, there are no restrictions on how you can use the money.

Are There Alternatives to Cash-Out Refinancing?

There are some other lending solutions that can allow you to tap into your equity:

            • Home Equity Loan

            • Home Equity Line of Credit (HELOC)

            • Reverse Mortgage

You can ask your lender about these other options and see which is best for you. Generally, a cash-out refinance will offer better mortgage rates than home equity loans and HELOCs. Many borrowers also prefer having one monthly payment rather than separate loan payments. The right solution will depend on a number of different factors, including your loan qualification standards. It may be easier to qualify for a HELOC or home equity loan than a cash-out refi. A good mortgage lender will provide personal guidance and assess your financial situation to help you decide.

If you are a homeowner in the Atlanta area looking to tap into your home equity and/or refinance your mortgage loan at a lower rate, contact Moreira Team | MortgageRight today.