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There may be several homeownership situations where a cash-out refinance makes great sense. You can refinance your existing mortgage loan while also taking out cash that you can use for other important expenses such as home improvements, medical bills or high-interest debts. A cash-out refinance is not the ideal solution for every homeowner. In this article, we will provide information and insight to help you decide if it’s worth exploring further.
What is a Cash-Out Refinance?
A cash-out refinance is a special type of home loan program that allows you to refinance your existing mortgage loan based on current mortgage rates. The prevailing interest rates may be lower than when you first got your home loan. Or, you may simply qualify for a significantly lower mortgage rate because you have a stronger financial standing than you did when you qualified for your original mortgage.
In addition to refinancing the home loan, a cash-out refinance is exactly what the name implies. It allows you to tap into your home equity (how much your home is worth minus what you still owe in principal on your current mortgage loan). You can cash-out money with this refinance program.
Here are a few key questions you should ask yourself when deciding if a cash-out mortgage refinance is worth considering:
Do I Need the Money?
This is easily the most important question. If you don’t really need the money from a cash-out refinance, it really doesn’t make sense to pursue one. You are much better off keeping your money in your home and continuing to let the equity grow until it is time to sell the property. Remember that this is a new loan and any money you take out is borrowing against your own home equity, so there are no benefits to cashing out if you don’t need the cash.
You will need to have built up a reasonable amount of equity before you can even apply for a cash-out refinance. Otherwise, what you do with any cash you take out during a refinance is up to you. One of the most common—and smart—uses of a cash-out loan or home equity line of credit (HELOC) is investing the money back into your property. If you want to make renovations and upgrades that will ultimately increase the house’s resale value, then it may be a worthwhile investment. You are essentially borrowing from your current home equity to improve your property and potentially increase your future home equity even more.
Other common uses for equity loans include paying off other debts, such as medical bills, credit cards, student loans or car loans. Again, you are still borrowing new money. However, mortgage loan interest rates are generally lower than most other types of personal loans and consumer credit lines. You may be able to borrow cash to pay off these higher-interest debts with a new lower-interest loan.
Can I Get a Lower Mortgage Rate?
Another common reason why people will refinance their home loans is because they can get a lower mortgage interest rate. This happens a lot with first-time home buyers who may have applied for their first home loan without a strong financial standing (low credit score, low down payment, etc.). They qualified for a mortgage, but ended up paying a higher mortgage rate. Now, they may be eligible for a lower interest rate. Either the average rates are down and/or their better financial standing enables them to qualify for a lower rate.
A cash-out refinance may help you kill two birds with one stone. You can refinance your mortgage at a lower rate and cash out some of your equity to put toward other important expenses. Again, you may not need to cash out anything; you will just want to do a traditional home loan refinance at a lower mortgage rate. You can lower your monthly mortgage payments or shorten the remaining payoff term of your loan.
Can I Benefit from a Cash-Out Mortgage Refinance?
Even if you don’t qualify for a lower mortgage rate, you may still be able to benefit from a cash-out refinance. The cash you take out could help you out of other bad financial situations. You will be adding more principal to your home loan and your mortgage payments may go up as a result. As we mentioned, mortgage loans will generally offer better interest rates than most other personal loans, credit cards or other consumer lines of credit. It may be your best lending solution if you really need the cash, especially if you have owned your home for a while and have built up a healthy amount of equity to use as collateral.
Every homeowner’s situation will be a little different. Cash-out refinancing is a great option for some mortgage borrowers. It is not a great idea for others.
If you have questions about cash-out refinance loans, HELOC credit lines or other mortgage lending solutions for current homeowners, contact Moreira Team | MortgageRight today. The quickest way to get started is by getting your custom rate and closing cost quote. It’s fast and free!