If you need cash to meet financial goals, you’ll find a variety of ways to obtain money. You can take out a personal loan or use a credit card. A cash-out refinance can also be an option if your home’s value has improved since you bought it.
Cash-out refinancing differs from a no-cost mortgage refinancing loan and traditional refinancing. ; Refinancing replaces your existing mortgage with a new one. The cash amount you’ll receive is the difference between the mortgage balance and your home’s current value. You can then use the cash to improve your home, consolidate debt, and fulfill other financial needs.
How cash-out refinancing works
Getting a cash-out refinancing is similar to when you’re getting any home loan. Your lender will assess your income, credit score, employment history, and other debts.
The amount of cash you’ll receive depends on the lender, but it’s usually 80% of your home’s current value. That way, you keep 20% of your home equity.
For example, your home’s value is $300,000, and you have $100,000 left to pay on your mortgage. This means you have 60% in home equity. If you need to keep 20% of your home equity, you’re eligible for 40% of the value in cash or $80,000.
By combining $100,000 remaining on your mortgage, you can take out a cash-out refinance amounting to $180,000. You’ll also pay appraisal fees, closing costs, and other expenses that come with taking out a home loan.
Why should you take out a cash-out refinancing?
Cash-out refinancing offers many significant benefits over other types of financing, which are:
- Financial goals: Anything goes one you receive the cash from refinancing. You can use it to consolidate debt, improve your home, or meet other financial goals.
- Higher credit score: A cash-out refinance helps you pay off financial obligations in full, improving your credit score. You have a better chance of negotiating for an interest rate and loan amount you want.
- Lower interest rates: Like regular refinancing, a cash-out refinance usually have lower interest rates compared to a home equity loan or a home equity line of credit.
- Tax deductions: If you use the money for home improvements, you may deduct the mortgage payments from your taxes, according to the IRS.
What are the risks and limitations of taking out a cash-out refinance?
Although cash-out refinancing is another way to gain access to money, it might not be the best choice for you. Here are its limitations:
- Closing costs: Like any refinancing, you’ll pay closing costs, usually 2% to 5% of the mortgage.
- Enabling bad habits: Using your cash-out can go wrong if you run up your credit card balances again.
- Foreclosure risk: Cash-out refinancing might end up with higher monthly payments. If you can’t pay these mortgage payments, you risk losing your home.
- New terms: Cash-out refinancing means you’ll have different conditions from your previous loan. You might get a different interest rate, monthly payments, or term length.
Getting a cash-out refinancing is tempting if you want to pay off debt or improve your home. However, it will make sense if you get an excellent interest rate and a sound use for the money.