Home values have been rising and mortgage rates are low, making now an attractive time to get a cash-out refinance. If you’re a homeowner with equity in your home and you need cash for a large expense, project or investment, a cash-out refinance may be the answer. Here’s an intro to what this special type of mortgage is, how it can be used and what you should know.
What is a cash-out refinance?
A cash-out refinance is a mortgage that replaces your current loan with a new one for a larger amount and provides you with the difference in cash. For example, if you owe $150,000 on your home and refinance for an amount of $200,000, you’d receive $50,000 in cash. These funds come from your home’s equity: the difference between what your home is worth and how much you owe on your mortgage.
Cash-out refinances are usually limited to loan amounts of up to 80% of your home’s current value. Put another way, you typically need to keep at least 20% equity in your home. Therefore, if you owe $280,000 on a $350,000 home (80% of the value), you might not be able to take any cash out. Some loan programs offer exceptions, however, including VA cash-out refinance loans for military-connected borrowers.
What are good uses of a cash-out refinance?
While you’re free to spend your funds from a cash-out refinance on anything, these are some of the commonly recommended uses.
Funding home repairs or renovations
One of the simpler ways to fund a home renovation project is with a cash-out refinance. You’ll be able to spend your funds as you like with no deadlines, reporting requirements or limitations. But if you can’t take out enough cash for your project, a home renovation loan may be what you need.
Consolidating debt
A cash-out refinance can be a great way to consolidate high-interest debt into a low-interest mortgage. Paying off high-interest balances like credit card debt with funds from your refinance in this manner may allow you to save on your interest charges.
Covering large expenses
As mentioned, the funds from a cash-out refinance can be used for anything. This includes purchasing a vehicle or another home, paying for college tuition or covering emergency expenses.
Withdrawing funds to invest
With mortgage interest rates so low, you may get a better return on your money by investing it rather than leaving it in your home. Therefore, you may wish to put your funds from a cash-out refinance into other investments such as your retirement fund, an investment property or another opportunity.
What should you know about cash-out refinances?
Before you jump in and apply for a cash-out refinance, make sure you consider the following:
- You can’t usually tap 100% of your equity. As explained earlier, you often must maintain at least 20% equity in your home when getting a cash-out refinance, but always ask a mortgage expert which options are available to you.
- Your loan terms will change. Since a refinance replaces your old mortgage with a new one, you will need to accept new mortgage terms, including a new interest rate, new term (length) of the loan and new monthly payment. However, obtaining a new interest rate can be a good thing if a lower rate is available.*
- You usually need an appraisal. Typically, your home will need to be appraised before you get a refinance since your new loan amount is limited by your home’s value.
- You’ll pay closing costs. As when obtaining any new mortgage, you’ll need to pay closing costs, which often equal 2-5% of your new loan balance. However, it may be possible to finance these fees into your loan so you don’t need to pay out of pocket to get your refinance.
- You won’t get cash right away. It will take about three to five days after your closing for you to receive your funds.
Now is a great time for many people to get a cash-out refinance because home values are at record highs, and mortgage rates are near record lows. That means many homeowners have ample equity, and many can obtain low mortgage rates and monthly payments when they refinance.*
To learn about your mortgage refinance options, get in touch today for a free consultation.
Draper and Kramer Mortgage Corp. does not provide financial planning or investment advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for such advice. Consult with your financial planning or investment advisers before engaging in any transaction.
* By refinancing a mortgage, total finance charges may be higher over the life of the new loan. Contact your Draper and Kramer Mortgage Corp. loan officer to discuss the total expected costs and savings of your refinance.
