Whenever interest rates drop, homeowners across Georgia consider refinancing options such as a rate and term refinance, cash out on a refinance, or purely just to refinance a home to pay off debt.
Refinancing can mean significant benefits—namely, savings that amount to more money in your pocket each month. If you’re considering refinancing a home to pay off debt or getting a cash out on a refinance, it’s important that you know just what you can achieve from refinancing.
Cash Out on a Refinance: What Is Refinancing?
When you refinance a mortgage to consolidate debt or get a rate and term refinance, your goal is to achieve a lower interest rate on your home’s mortgage, and/or possibly find a better loan term for you. Simply put, if your current interest rate is 6% and you can lower that amount by even one percentage point, you have the potential to save big.
How Do Refinances Such as Cash Out on a Refinance and Rate and Term Refinance Work?
Let’s say your mortgage is $100,000. At a 5.5 percent interest rate over 30 years, you’ll owe $568 every month (on principal and interest). Drop that rate to 4 percent over 30 years, and you’ll pay just $457. From there you can find the right refinance, such as a rate and term refinance, that adjusts your term and the rate you pay each month.
If you’re looking to refinance so you can take the difference in cash, a cash out refinance is the right option for you. Many homeowners use this to help pay off debt or if they have a large home improvement project in the works.
What Can You Do When You Refinance?
Homeowners refinance for a number of reasons. Here are just a few:
- A lower interest rate gives you a lower monthly payment.
- With a shorter loan term, you’ll pay off your mortgage quickly.
- You can get out of an adjustable-rate loan. As the interest rate climbs, payments become higher and higher. Refinancing can get you a fixed-rate loan and a more stable payment.
- You can get cash out of the home’s equity by taking cash out on a refinance. For example, refinancing a $120,000 mortgage (with $80,000 in equity) for $150,000 brings on a number of benefits. You could pay off the current loan for $120,000 and use the remaining cash for home improvements. You’d still have $50,000 equity in the home.
- You’ll have more spending money. With the savings you reap from a lower monthly payment, you can pay off other bills or invest in a second home.
Your Refinancing Options
Before you proceed with refinancing, consider these factors:
- Your credit score. If you want a good deal, you’ll need a decent score. Typically, a credit score of 740 or higher attracts the best rates, but if your score is lower, you want to talk to a mortgage specialist to understand your options.
- Home equity. If you don’t have a lot of equity, you’ll be hard-pressed to secure a loan. There are government programs that can help, but they’re not easy to get. 20% is needed for cash out on a refinance at a minimum, only going down 80% LTV.
- It won’t make sense for everyone to refinance. Lenders will assess your debt ratio to determine if you qualify. In general, your new payment should be less than 30 percent of your monthly income (gross), while your total debt must be below 40 percent.
Figuring out the right mortgage move can be confusing. That’s why BrightPath is here to help. Give us a call at 888-222-6003 for expert advice with a free consultation so you can make the best decision for you.