There may come a point in your homeowner journey where refinancing your mortgage may be something to consider. A cash-out refinance may be helpful if you need some financing for various life events or unexpected expenses. We’ll cover some of the best ways to use a cash-out refinance and explain the difference between using a cash-out refinance vs. home equity loan to understand what option best suits your needs.
What is a cash out refinance
A cash-out refinance is a new loan that replaces your existing mortgage and provides you with extra cash to use on expenses like home improvements or medical emergencies, or to consolidate higher-interest debt. A cash-out refinance is typically only an option if you have a considerable amount of home equity. Home equity is the difference between what you owe on your mortgage and how much your home is worth.
For example, if your home is appraised at $200k and you owe $100k on your mortgage, you have about $100k in home equity. With this example, you may be approved for a cash out refinance up to 80% of the appraised value of your home, or $160k. Paying off your existing mortgage would leave you with $60K in cash.
How does cash out refinance work?
You'll receive your lump-sum payment after closing, and you can start using your funds 3 days after you close. You'll pay standard closing costs with a cash out refinance, like application, appraisal and title fees. You must use this lump sum of money to pay off your existing mortgage and then whatever is left over is yours to use. If you refinance to a fixed-rate mortgage, your payments will be fixed for the life of your loan, and you'll have a fixed rate on the full amount of your lump sum payment.
How to use a cash out refinancing option
You can use cash-out refinancing for several things:
Pay for home improvements
Whether you’re looking to create a relaxing backyard oasis , upgrade your kitchen to one a professional chef would envy, or make energy-saving upgrades to your home, a cash-out refinance can help you access the funds you need to bring your ideas to life. It’s important to remember that some upgrades you make to your home may help boost its value in the future.
Consolidate your higher-interest credit card and loan debt into one payment. Since the interest rate on your mortgage will likely be lower than your credit card and loan rates, you could enjoy lower payments.
Make a big purchase
If you need to buy a car, find yourself needing extra money for college expenses, or are looking to have a wedding in the near future, a cash-out refinance may help you access some much-needed funds to apply to a big purchase. Whatever you need it for, a cash-out refinance lets you use your home’s equity to cover these costs at a lower rate than many other loans and credit cards.
Home equity loans vs. cash out refinancing
A cash-out refinance option shouldn’t be confused with a home equity loan. A home equity loan doesn’t replace your mortgage. Instead, it is a second mortgage that you borrow against the equity in your home. You would have two monthly payments with a home equity loan. Home equity loans usually have a higher interest rate as well, since you are taking out a second loan.
How to qualify for a cash-out refinance loan
A cash out refinance typically requires the same requirements as your first mortgage and any other refinance. Keep in mind, that different lenders may vary.
A cash out refinance can help you when you are in a financial bind, or when you’re looking to make some changes to your home. There are many savvy ways to use the extra money that comes with a cash out refinance. Speak with your Home Lending Advisor today to figure out how you can best use this option!