A cash-out refinance can be a good idea if you currently have a mortgage and need quick access to a large amount of cash. Most people want to avoid using a credit card or applying for an installment loan because of the traditionally high interest rates. To cash-out on your mortgage means that you receive a new loan with a balance that is higher than what you currently owe on your mortgage loan. You are free to spend the additional funds how you see fit after you pay the mortgage in full.
Equity Requirements with a Cash-Out Refinance
At BrightPath, we require lenders to make their mortgage payment on time for 12 consecutive months and to have built up at least 20 percent equity in their home. To determine how much equity you currently have, find your original mortgage paperwork that lists the purchase price of the property. You can then look at your most recent mortgage statement to see the current balance. Lastly, you will need your most recent property tax statement that lists the assessed value of your home to see how much it has increased since you purchased it.
Assume that you bought your house 10 years ago for $200,000 and it now holds a value of $250,000. You still owe $150,000 on the original mortgage, which means that your equity is 40 percent. You would easily qualify for a cash-out refinance in this case as long as you met the timely payments requirement.
Benefits of a Cash-Out Refinance Loan
Besides the ability to access a large amount of cash, pursuing this loan option can help you save thousands of dollars over the life of your mortgage loan by lowering the annual percent rate (APR). If you currently have an adjustable rate mortgage, getting a new loan gives you the opportunity to switch to a fixed-rate mortgage. You also enjoy all the tax benefits normally associated with being a homeowner on both your federal and state returns.
You Will Go Through a Traditional Loan Process
Applying for a cash-out refinance is similar to the process of applying for your original mortgage loan. You will need to gather documentation that proves your assets, income, and debts. BrightPath will also access your credit report. We use this information to determine if your new monthly mortgage payment, which includes payment towards your home and the cash you took out, is affordable.
You will pay closing costs and other fees just as you did the first time around with your mortgage. This includes interest for the full amount of the loan. Other fees that you may need to pay at closing include:
- Credit report
- Title search
It is important to understand that a cash-out refinance and a home equity loan are two different things. You replace your existing loan and receive extra cash with the first type. With the second type, you keep your remaining mortgage and open another loan based on the amount of equity you have built up in your home.
Most Common Reasons for Obtaining a Cash-Out Refinance
According to a September 2018 report in U.S. News and World Report, more people indicate that they use the cash from this type of loan to make home improvements than any other reason. This can make good financial sense because it increases the overall value of your home. Paying off student loans by consolidating them into the mortgage payment or using the funds as a primary way to pay for schooling are also popular uses of the cash-out refinance loan.
Others use this loan type to pay off credit card debt. While this can be a good solution, it is important not to free up your credit cards only to get in debt with them again. You may even want to consider closing the credit cards you are paying off to avoid that temptation. If you are a small business owner, the cash-out refinance loan can give you fast access to cash to make additional investments in your company such as new properties.
If you’re interested in exploring this option for your own finances, contact BrightPath today by calling 888-222-6003. We’ll be happy to look at your financial situation to determine if a cash-out refinance loan is best for you. You can also check out our Refinancing Guide or other refinance loan options.