Cash-Out Refinancing and Home Equity
WHAT IS IT?
In simple terms, a cash-out refinance replaces your current mortgage with another loan that:
Pays off your current mortgage balance.
Uses the equity in your home to provide additional funds for other purposes.
A cash-out refinance is a way to both refinance your mortgage and borrow money at the same time. You refinance your mortgage and receive a check at closing. The balance owed on your new mortgage will be higher than your old one by the amount of that check, plus any closing costs rolled into the loan.
It’s sort of like “backing up” your mortgage by taking out some of the money you’ve paid into it and increasing the mortgage principle owed as a result.
Cash-out refinancing is basically a combination of refinancing and a home equity loan. You can borrow the money you need, as with a home equity loan or line of credit (HELOC).
Get started in just minutes to find out if a cash-out refinance is right for you.
WHEN TO CONSIDER?
How do you know if a cash-out refinance is the right move? There’s no hard-and-fast answer to that question, but you may want to consider refinancing if any of the following situations apply:
Interest rates have dropped substantially since the last time you financed your home.
You intend to stay in your home for several more years.
You can shorten your loan term.
IMPORTANT QUESTIONS TO THINK ABOUT
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 the term of your current loan?
How long is the term of the new loan?
You can shorten your loan term.
Are interest rates lower than your current financing?
How much cash do you need?
What’s the monthly payment amount?
What’s the effect on your taxes?
What’s the total cost of borrowing?
What’s your break-even point?
A QUICK SCENARIO
To qualify for a cash-out refinance, you need to have a certain amount of home equity. That’s what you’re borrowing against
Let’s say your home is worth $250,000 and you owe $150,000 on your mortgage. That gives you $100,000 in home equity, or 40 percent of the home’s value.
You generally want to retain at least 20 percent equity after refinancing (though some lenders will go lower), so that gives you $50,000 available to borrow.
To borrow that amount, you would take out a new mortgage for $200,000 ($150,000 already owed plus $50,000) and receive a $50,000 check at closing. This doesn’t take into account your closing costs, which are 3-6 percent of the loan amount and are often rolled into the mortgage.
ADVANTAGES OF CASH-OUT REFINANCING
Refinance mortgage rates tend to be lower than the interest rates on other types of debt, so it’s a very cost-effective way to borrow money. If you use the cash to pay off other debts such as credit cards or a home equity loan, you’ll be lowering the interest rate you pay on that debt.
Mortgage debt can also be repaid over a considerably longer period than other types of debt, up to 30 years, so it can make your payments more manageable if you have a large amount of debt that must be repaid in 5-10 years.
If market rates have dropped since you took out your mortgage, a cash-out refinance can let you borrow money and reduce your mortgage rate at the same time.
If market rates have dropped since you took out your mortgage, a cash-out refinance can let you borrow money and reduce your mortgage rate at the same time.
Mortgage interest is generally tax-deductible, so by rolling other debt into your mortgage you can deduct the interest paid on it up to certain limits, assuming that you itemize deductions.
If you use the funds to buy, build or improve a home, you can deduct mortgage interest paid on loan principle up to $1 million for a couple ($500,000 single). But if you use the proceeds from a cash-out refinance for other purposes, such as education expenses or paying off credit cards, the IRS treats it as a home equity loan, and you can only deduct the interest on the first $100,000 borrowed by a couple ($50,000 single).
DISADVANTAGES OF CASH-OUT REFINANCING
With a cash-out refinance, you’re putting your home up as collateral. So if that additional debt eventually causes you to default on your mortgage payments, you could lose your home as a result. Other debts such as credit cards, auto loans or may charge higher interest rates or demand faster repayment, but you won’t lose your home if you don’t repay them.
So a cash-out refinance should be approached with caution. It can be a very useful financial tool if you’re confident you can handle the additional mortgage debt and can put the money to good use. But be wary of viewing your home as a bank and source of low-cost loans for routine or nonessential spending, or for risky business ventures – that’s an easy way to get into financial trouble.
To help you answer these questions and determine whether a cash-out refinance may help your long-term financial goals, contact us today and we’ll help you get started.
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Disclaimer:
NOT A GUARANTEE, OFFER OR AGREEMENT. EVERETT FINANCIAL, INC. D/B/A SUPREME LENDING NMLS ID #2129 (www.nmlsconsumeraccess.org) 14801 Quorum Dr., #300, Dallas, TX 75254. 877-350-5225. © 2017. Information, rates, & programs are subject to change without prior notice. Subject to credit & property approval. Not affiliated with any government agency. Intended for Texas Consumers Only. Texas- SML Mortgage Banker Registration Residential Mortgage Loan Originator.