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.
Cash-Out Refinance Loan Programs
Do you live in Willmar or anywhere in Minnesota? Have you ever wondered how you can carry out 2 important financial tasks at the same time? We found a seamless way to do so:
- Refinance your mortgage to a new lower interest rate.
- Borrow additional money to pay bills or use in any way you see fit.
Essentially, this is what cash-out refinancing loan programs are all about. Of the three popular home equity loan types, cash-out refinancing is one of them; fixed-rate home equity loan is another and HELOC (home equity line of credit) is the third.
Cash-Out Refinance vs Fixed-Rate Home Equity vs HELOC
- Cash-Out Refinance: This is the type of loan which you take out on an already existing loan either to get lower interest rates and/or to borrow additional funds.
- Fixed-Rate Home Equity: As the name implies, the fixed-rate closed-end home equity loan comes with a fixed interest rate that fully amortizes over a predetermined period.
- Home Equity Line of Credit: With HELOC, the interest rate you are charged depends on the market going rate; unlike the fixed-rate home equity loan, your monthly mortgage payment is calculated on the basis of the amount of money you borrowed and the going market interest rate.
Let’s examine the when, the why and the where for cash-out refinancing loan programs.
When and Why is a Cash-Out Refinance Loan Right
Homeowners finance and refinance loans for different reasons but why should you do so as a homeowner in Minnesota? If your answer points to only lower interest rates, then maybe it is time to do a re-evaluation and see if it is wise to proceed with that cash-out refinance decision. Here are some metrics to help you look before you leap.
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- Liabilities vs Assets: It is necessary to know for sure why you need to take out a cash-out refinance loan. If it is just for the flex and chill, then it is not a wise spend but only an incoming liability; on the flip side, if it is to fund education for yourself, your significant other or your kids, if it is to invest in a current business, then it may make sense to take out one.
- Lower interest rates: Fortunately, the interest rate for this type of loan does not fluctuate like HELOCs, so if the interest rate falls below the current rate on which your current monthly mortgage rate was calculated, it is a may be a good time to take advantage of one. Doing so may save you some costs, both in interest paid over time, as well as actual monthly payments – money channeled away from mortgage and back into your hands so that you can spend it or invest it on other important things.
- When you qualify: You have to qualify for this type of loan and your qualification is dependent on criteria such as your creditworthiness, your current income and your stake/equity in your house (i.e. do you own more stake/equity in your house?) What this means is that your credit score has to be high and your income has to be stable enough to afford the monthly mortgage payments. Failing the “qualification test” on any of these criteria means that you cannot qualify for this type of loan at this time.
- Length of stay: How long do you plan to stay on this property? If it is a short timeframe, for instance a couple of years, then it is not recommended as a good time to take a cash-out refinance loan.
- Refinancing costs: It is vital for you to know how much you will likely spend for closing costs on your new loan: property appraisal fee, application fee, title insurance and closing costs, et al. Should these costs outweigh the cost to be saved on monthly mortgage payments, it is time to sleep on this, think it through and see if this loan program is the best option for you. There is no point spending lots of money in upfront payments and when you analyze the upfront costs, you see tiny savings or no savings at all on your refinanced loan.
- Effective tax rate: Before you refinance, you should compare your effective tax rate pre-refinance and post-refinance. Should you see a significant increase in the amount of taxes you will pay after the refinance, it is best to reconsider your decision; however, if the reverse is the case, you can proceed to refinance into this type of loan.
- Long term thinking: This has to do with weighing the time remaining on 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 pay over a long period of time.
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.
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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.
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.
Where Can You Take Out a Cash-Out Refinance Loan Program?
Supreme Lending Willmar is one of the best the places in the United States of America for you to get a cash-out refinance loan. We have an extremely fast cash-out refinance loan program for borrowers in Willmar, Minnesota; typically closing within a three-weeks. We will walk you through our 6 step loan process:
1. You can start the application process and a Loan Officer is assigned to you and your application. The application form is available online, via phone, via fax, via email or in person.
2. We will conduct a property appraisal. We will send required disclosures to you during this process. Afterwards, we will send the appraisal to our underwriting department.
3. We compile and process your loan application information. For professional reasons and to prevent errors, this is usually done through email.
4. We evaluate your credit history and credit score to make sure they are in line with recommended industry guidelines..
5. When it is time to close on your new loan, we will prepare and send the necessary documents to the title company. Afterwards, we prepare your Closing Disclosure (plus final closing figures) and deliver them to you to sign within a 3-day period.
6. We offer you after-loan support on the phone.
Visit us here to get started with our cash-out refinance loan program or call us up on (320) 262-8503.