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Is a Cash-Out Refinance Right for Me?

Is a Cash-Out Refinance Right for Me?
By: CCCU

06/13/2019

If you’re a type-A homeowner who has been making on-time mortgage payments for years, you probably have a decent amount of home equity built up. Have you thought about refinancing your home for a better rate to lower your monthly mortgage payment? Now might be a great time to do that.

Renegotiating your mortgage can be beneficial whether you opt for a cash-out refinance or traditional refinancing option, but it’s crucial that you get all the facts before deciding which one will work best for you. Additionally, you may even be able to get money back from what you’ve already paid on your home loan if you decide to do a cash-out refinance.

How does a cash-out refinance work?

So, what is a cash-out refinance? Simply put: it’s a method of refinancing your home while borrowing money at the same time. When you opt for a cash-out refinance, you’ll get some money back when you close.

How does a cash-out refinance work? When all is said and done, the balance you owe on your new mortgage will be at a higher amount than your original balance. The difference between these two numbers will be the amount of the payment you receive at closing, minus closing costs. Basically, you’ll be taking out some of the money that you already paid through previous mortgage payments. In return, the mortgage principal you owe will increase.

If you’ve got unexpected expenses on the horizon, need to make repairs on your home, or are looking to invest elsewhere and need money upfront, a cash-out refinance might be a good solution. There are also no restrictions on how you can use the money you receive from this type of refinancing.

Traditional refinancing vs. cash-out refinancing

If you don’t need the lump sum of money that you’d get from a cash-out refinance, you might still benefit from a traditional refinancing option. As a homeowner with little equity, a significant portion of your monthly mortgage payment goes to interest. With a lower interest rate, you won’t have to pay as much each month on your mortgage. Refinancing could save you a few hundred dollars a month just on interest alone. To decide between cash-out refinancing and traditional refinancing, think about your current mortgage payment, interest rate, need for cash, and how much home equity you have.

How do I qualify for a cash-out refinance?

You won’t qualify for a cash-out refinance unless you have a certain amount of home equity either through your down payment, years of mortgage payments, or both. The more mortgage payments you’ve made, the less you owe on your loan, which gives you more equity to qualify with. Your home equity is what you’ll be borrowing against when you opt for a cash-out refinance.

Should you do a cash-out refinance?

So, is a cash-out refinance right for you? This type of refinancing can be an excellent option depending on your specific needs and situation. Mortgage rates are usually lower than interest rates on credit cards, car loans, and other types of debt, so if you plan to use the cash to pay off other loans, a cash-out refinance will be cost-effective. Additionally, mortgages can be paid off over decades (up to 30 years), which might be more manageable than paying off more immediate debts.

Keep in mind that by taking out money through a cash-out refinance on your home, you will lose all or most of your equity you had and will essentially be starting over with paying off the loan you started. Another disadvantage to cash-out refinancing is that you’ll have to pay closing costs for the entire loan amount.

In most cases, a cash-out refinance will be beneficial if you’re able to reduce your mortgage rate at the same time or if you plan to borrow a large amount of money. If you need less cash, you may want to consider a home equity loan or a home equity line of credit (HELOC). Be sure to weigh out all the pros and cons of each type of refinancing option and assess your personal finances before making your decision.

Still have questions about refinancing an existing mortgage with a cash-out refinance option? Contact us today and let us know how we can help pick the right refinancing solution for you.

 

 

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