Is Cash-Out Refinancing Right for Me?
Thanks to the wide variety of different mortgage products available on the market place, you can choose many different types of mortgages to find the perfect loan for your situation.
Wondering if a cash-out refinance mortgage is the right option for you? Here are some signs you should consider this type of loan as well as a few of the qualifications you need to meet:
- You want cash for a home remodel, college tuition, a vacation, or other types of expenses
- You want to use a cash out refinance to pay off high interest debts so you can consolidate them with your mortgage
- You can afford the change in payment associated with your new cash out refinance mortgage
- You have at least 20 percent equity in your home if doing a cash out refinance for your primary property
- If considering a cash out refinance for a vacation home, an investment property, or any other type of second home, you have at least 25 percent equity
- Your credit score is at least 620 for a traditional mortgage
- Your credit score is at least 580 and you qualify for an FHA-backed cash out refinance
- You have made all your mortgage payments on time for at least the last 12 months
If you meet those criteria, you should contact BrightPath Brilliant Mortgage Solutions today to learn more about your options.
How Does a Cash-Out Refinance Differ From a Rate-and-Term Refinance?
You can refinance your mortgage in a few different ways, depending on your current and long-term financial goals. If you opt for a cash out refinance, you get essentially get cash in your pocket, but you agree to owe more on your mortgage.
To give you an example of how that works, imagine your home is worth $300,000 and you owe $200,000 on your current mortgage. You want $40,000 to spend redoing your kitchen and you decide that a cash out refinance is the best option.
So, you contact a lender cash-out and you borrow $240,000. Of those funds, $200,000 goes to cover your existing mortgage and $40,000 goes to you for your kitchen remodel. With the new mortgage, your interest rate may change or stay the same, but in most cases, you should expect to pay a slightly higher interest rate with a cash out refinance mortgage than with a rate or term refinance.
In contrast, with a rate or term refinance, the objective of the refinance is different. Rather than putting cash in your pocket, these mortgages allow you to change the interest rate or the term of your mortgage. To continue with the above example, say you owe $200,000 on your mortgage but your interest rate is 5 percent. You decide to refinance for a lower interest rate of 3 percent. Now, because your rate is lower, you also reduce your monthly payments.
Alternatively, you decide that you want to change the term on your loan. In most cases, mortgages have 30 or 15-year terms, and the loans are set up so that you pay the same amount every month for the term of the loan. Once the term is up, you own the home outright.
If you have a 30 year term and you want to pay off your mortgage faster, you can choose to just double your payments every month, but in some cases, you may want to refinance to a 15-year term. Often, making that jump qualifies you for a lower interest rate. In some cases, if you need extra time, you may want to refinance from a 15-year to a 30-year term. Sometimes, you may be able to do a rate-and-term refinance that changes both the term and the rate of your existing mortgage.
What Else Should You Know Before Deciding Whether to Cash-Out Refinance?
As explained above, cash out refinance mortgages are different than second mortgages, home equity loans, and home equity lines of credit (HELOC). In particular, these mortgages get rolled in with your primary mortgage. They are not a separate loan like the other options on the list. In most cases, you also receive a lower interest with a cash out refinance loan than you do with a home equity loan or a HELOC.
Sometimes, you may even receive a lower interest rate than you are paying on your current mortgage, but that varies depending on current interest rates and the rates when you originally took out your mortgage.
Usually, you can only cash out some of your home’s equity. You can’t take out cash for all your equity. But, in the long run, that helps to protect your home by ensuring you don’t get upside down in your mortgage (where you owe more than your home’s value.)
Typically, you don’t have to explain to the lender how you want to use the cash, but for your own sake, you should plan carefully. For instance, paying down consumer debts with a cash out refinance can be a good idea in terms of saving on interest and consolidating multiple payments into one, but you need to make sure you can afford the new payment.
Otherwise, you may default and risk losing your home. On the upside however, you stand to improve your credit when you use the cash to pay off debts, and you may get a larger tax deduction related to mortgage interest.