When does getting a cash out refinance make sense?
For homeowners who have built up a substantial amount of equity, and could use some cash to help pay for large expenses, a cash out refinance may be an ideal solution. However, cash out refinancing doesn’t make sense in every situation and shouldn’t be used on a whim. In today’s post, we’ll cover the basics of cash out refinancing, as well as a few common situations in which they can be helpful.
What is a Cash Out Refinance?
A cash-out refinance is a type of mortgage refinancing through which the homeowner is able to tap into their home’s equity and receive cash to use as they please. Here’s how it works: A homeowner can refinance their mortgage for more than what they currently owe, and the difference is given to them in the form of cash.
Here’s an example: If you owe $160,000 on your mortgage, and you get a cash-out refinance for $200,000, you can receive the difference of $40,000 in cash.
Restrictions and Qualifications
There are a handful of home loan programs that offer cash-out refinancing, and each of them will have their own guidelines and restrictions. Generally speaking, borrowers will most likely have to meet certain income and credit qualifications, as well as have a certain amount of equity in their home.
Situations When A Cash Out Refinance Makes Sense
Cash out refinancing can be a great way to get access to cash without having to rely on loans that carry higher interest like credit cards, retail lines of credit, personal loans or payday advance loans. With a cash-out refinance, the interest rate you’ll pay is likely to be significantly more affordable than rates for those other loan options – some of which may have rates in the double-digits.
Here are a few situations where a cash-out refinance could be an ideal, affordable solution:
Consolidating Debt – Use the cash from a cash-out refinance to pay off your other debts, particularly those with high rates and balances. This can be a great solution for borrowers with balances on multiple credit cards or those who have multiple types of debt – unpaid student loans, medical bills, unpaid taxes, etc.
Investing In Yourself – Putting the money from a cash-out refinance toward something that will better your life, your career or your overall health can be a great way to use this loan product. Whether you want to go back to school to obtain a degree, pay for therapy sessions not covered by your insurance, or start your own small business, you can use the cash proceeds from a cash-out refinance for a variety of goods and services that will improve your life.
Investing in Another Home – You may be able to use the money from a cash-out refinance to fund the down payment on another home. Maybe your dream is to have a vacation home at the beach, or you’re thinking about investing in rental property to generate more income. Either way, if you can get a cash-out refinance on your current residence, it could help pay for your second residence or investment property. This could help make the loan on that second property more affordable.
Here’s an example: Let’s say you currently owe $160,000 on your mortgage. You get a cash-out refinance of $200,000, giving you $40,000 in cash. And let’s say you want to buy a condo for $100,000. You’ll likely need a down payment of at least 20% ($20,000) to avoid paying expensive private mortgage insurance. Luckily, with your cash out refinance proceeds, you can make the 20% down payment, and still have half leftover — which could be used to fix up the property, or you could hold onto it and use it to pay for other expenses that come up, like HOA dues, repairs, commissions to rental agents or property managers, etc.
Keep in mind, there may be other situations in which a cash-out refinance makes a lot of sense. However, there are several situations in which a different solution may work better. To find out if a cash-out refinance would be a good choice for your financial and homeownership goals, talk to one of our experienced lenders.
Here are some related posts you may be interested in:
- The Difference Between a Cash Out Refinance and a Home Equity Loan
- Buying a Second Home in Sonoma County
Call (707) 522-1887 to connect with one of our mortgage experts and request a free Cash Out Refinancing rate quote.