Cash-Out Refinancing 

Put simply, a cash-out refinance replaces your current mortgage with another loan that: 

  • Pays out your current mortgage balance.  
  • Uses your home equity to provide additional funds for additional purposes. 

A cash-out refinance is a way to refinance your mortgage, while borrowing money at the same time. You receive a check at closing after you refinance your mortgage. The amount owed on your new mortgage will be greater than your old one by the amount of that check, in addition to any closing costs rolled into the loan. 

It’s like you’re “backing up” your mortgage by taking out some of the funds you’ve paid on it and increasing the mortgage principle owed as a result. 

Cash-out refinancing is basically the combination of refinancing and a home equity loan. You can borrow the money you need, just like you could with a home equity loan or line of credit (HELOC). 


Cash-Out Refinance Loan Programs

Do you live in Houston or anywhere in Texas? Ever wondered how you can carry out two important financial objectives simultaneously? Here’s a seamless way to do so: 

  1. Refinance your mortgage to a new one at a lower interest rate 
  2. Borrow additional funds to pay bills or in any way you see fit 

Basically, this is what cash-out refinancing is all about. It’s one of the three popular home equity loan types. The second and third are fixed-rate home equity loans and home equity line of credit (HELOC). 

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Cash-Out Refinance vs Fixed-Rate Home Equity vs HELOC
  • Cash-Out Refinance

    This type of loan is when you take out on an already existing loan either to get a lower interest rate and/or to borrow more funds

  • Fixed-Rate Home Equity

    As the name suggests, a fixed-rate closed-end home equity loan comes with a fixed rate of interest that fully amortizes over a predetermined period

  • Home Equity Line of Credit

    With HELOC, your charged interest rate depends on the market going rate. Unlike the fixed-rate home equity loan, your monthly mortgage payment is calculated based on the amount of money you borrowed, as well as the going market interest rate.

    Let’s take a look at the when, the why, and the where for cash-out refinancing loan programs.

When and Why a Cash-Out Refinance Loan is Right for You

There are many different reasons why homeowners decide to finance and refinance their loans. Why should you do so as a homeowner in Houston? If you’re only looking to lower interest rates, it might be a great time to re-evaluate and see if you should proceed with a cash-out refinance decision. Here are some metrics to consider before taking the leap.

  • Liabilities vs Assets

    It’s important to be sure about why you need to take out a cash-out refinance loan. If it’s just for kicks, then it’s probably not the best decision as it will probably only serve as an incoming liability. On the other hand, if you’re thinking about using it to fund education for you or your family or invest in a business, it would make more sense.

  • Lower interest rates

    The great thing about cash-out refinancing is that the interest rate does not fluctuate like a HELOC loan. If the interest rate falls below the current rate to which your current monthly mortgage rate was when it was initially calculated, it may be a great opportunity for you to take advantage of. Doing so could save you some money, both in interest paid over time, as well as actual monthly payments. Think of it as money channeled away from your mortgage and back into your hands for spending or investments.

  • Qualifications

    You must meet certain criteria to qualify for this type of loan, such as creditworthiness, current income, and the stake/equity you have on your house. This just means: is your credit score high enough? Is your income stable enough to afford the monthly mortgage payments? How much stake/equity do you have on your house? If you’re not able to meet this criteria, you may not be able to take out this type of loan at this time.

  • Length of Stay

    How long do you plan on staying at this property? If it’s just for a couple of years, it’s not recommended as a good time to take out a cash-out refinance loan.

  • Cost of Refinancing

    It’s important for you to know how much you will likely spend on closing costs for your new loan. This may include fees such as property appraisal, application, title insurance, closing costs, etc. If these costs outweigh the amount you would be saving on your revised monthly mortgage payments, it would be wise to re-evaluate and see if this loan program would be the best option for you. If you analyze the upfront costs and you see little to no savings on your refinanced loan, there is no real benefit in taking out this type of loan.

  • Effective tax rate

    Before you decide to refinance, you should compare your effective tax rate pre and post-refinance. If there is a significant increase in the amount of taxes you will pay after refinancing, it’s best to reconsider your decision. However, if the reverse is true, you can proceed to refinance into this type of loan.

  • Thinking Long-Term

    This considers weighing the remaining time of your current loan. How much time you have left on your mortgage adds up to how soon you can pay it off, or the amount you would be paying over a longer timeframe.

The Pros of Cash-Out Refinancing

Refinanced mortgage rates tend to be lower than the interest rates on other types of debt, making it a very cost-effective way to borrow money. If you use the cash to pay off other debts like credit cards or a home equity loan, you’ll be lowering the interest rate on that debt. 

Mortgage debt can also be repaid over a much longer timeframe than other types of debt, up to 30 years, so if you have a large amount of debt that must be repaid in 5-10 years, it can make your payments more manageable.  

If the market’s interest rate has dropped since you took out your mortgage, a cash-out refinance can let you borrow money and reduce your mortgage rate simultaneously. 

Interest from mortgages is generally tax-deductible, so by rolling other debt into your mortgage, you can deduct the interest paid on it up to certain constraints. This is only if you itemize your deductions. 

If you plan to use the money to build, buy, or improve a home, you can deduct mortgage interest paid on loan principle up to $1 million for a couple or $500,000 for single. If you use the funds from a cash-out refinance for other purposes, like education expenses or paying off credit cards, the IRS treats it as a home equity loan, so you can only deduct the interest on the first $100,000 borrowed by a couple and $500,000 as single. 

The Cons of Cash-Out Refinancing

With a cash-out refinance, you’re putting your home up as collateral. If that additional debt eventually causes you to default on your monthly mortgage payments, it could result in you losing your home. Other debts like credit cards, student loans, or auto loans may charge higher interest rates and ask for faster repayment, but you won’t risk losing your home if they’re not repaid. 

It’s safe to say that a cash-out refinance should be taken seriously. It can be a very useful financial tool if you are confident that you can handle the additional mortgage debt and have good use for the extra cash. However, you should be wary of viewing your home as a bank and source of low-cost loans for routine or nonessential spending, as well as for risky business ventures. This would be an easy way to get yourself into financial trouble. 

When Should I Consider?

How do I know if a cash-out refinance is the right decision? There’s no clear answer to that question, but it may help sway you in the right direction if these situations apply” 

  • The market interest rate is substantially lower than the last time you financed your home. 
  • You plan to stay in your home for several more years. 
  • Your loan term can be shortened. 
Important Questions to Consider

With a cash-out refinance, you need to weigh the benefit of how you’re going to use the money against the amount of time it will take to pay off the loan. Refinancing may give you a lower interest rate, but if you extend your loan term, you may pay more interest over the life of the loan. Here are some things to think about:

  • How many years until the end of your current loan term? 
  • How long is the term of the loan you plan to get?  
  • Can you shorten your loan term?  
  • Are interest rates lower than your current rate?  
  • How much money do you need?  
  • What is the amount of your monthly payment?  
  • What effect does this have on your taxes?  
  • What is the total cost of borrowing?  
  • What is the point at which you break-even? 
A Quick Rundown

To qualify for a cash-out refinance, you must have a certain amount of home equity. That’s what you’re using as collateral. 

Let’s imagine your home is worth $250,000 and you owe $150,000 on your mortgage payment. That gives you $100,000 in home equity, or 40% of the value of the home. 

You typically want to retain at least 20% equity after refinancing (but some lenders will go lower), so that gives you $50,000 available to borrow. 

To borrow that sum, you would take out a new mortgage for $200,000 ($150,000 is what you already owe plus $50,000) and receive a cheque for $50,000 at closing. This does not consider your closing costs, which are usually 3-6% of the loan amount and are often rolled into the mortgage. 

Contact us today for help answering any of these questions and see if a cash-out refinance may be beneficial to your long-term financial goals. 

Where Can I Take Out a Cash-Out Refinance Loan?

Supreme Lending Houston is one of the premier places in the U.S. for you to obtain a cash-out refinance loan. We pride ourselves on our extremely fast loan program for borrowers in the Houston, Texas region with a typical closing time of three weeks or less. Let’s walk through all six steps of the loan process: 

  1. After you start the application process, a loan officer is assigned to you. Our application is easy to access online, by phone, fax, email, or in person. 
  2. We’ll conduct an appraisal of your property and send you required disclosures during this process. After that, we’ll send the appraisal to our underwriting department. 
  3. We compile and process the information on your loan application. For keep things professional and prevent the risk of error, we usually do this through email. 
  4. We’ll evaluate your credit history and score to make sure they’re aligned with the industry’s recommended guidelines. 
  5. When it’s time to close on your new loan, we’ll prepare and send the important documents to the title company. Afterwards, we prepare your closing disclosure (plus final closing costs) and deliver them for you to sign within a three-day period.  
  6. We’ll provide after-loan support by phone. Swing by our office or call us at 281-883-0800 to get started on our cash-out refinance loan program.