If you’re a homeowner who has a substantial amount of equity in your home, you may have thought about getting a cash-out mortgage refinance. This type of refinance allows you to use the equity in your home right now instead of waiting until you sell. This can enable you to pay down personal debt, make renovations or pay for other important financial responsibilities such as financing a child’s education or paying things like large medical bills. But is this a good option for you? Let’s look at the facts.
What is a Mortgage Refinance?
Refinancing your mortgage is where you take out a new mortgage loan and pay off the initial one. There are many reasons to do this. Some people are looking for a lower payment, some want to change the term of their loan, some want more favorable mortgage terms. Often, homeowners realize that the equity that they have in their home could help with current financial obligations such as sending a child to college.
Refinancing your home to take out equity is called a cash-out refinance. This lets a homeowner access the equity in their home that has built up over time and take “cash-out” to use at their discretion. The new loan, based on a current appraisal of the property showing the equity, is in excess of the old loan. When the old mortgage is paid off, the difference between the two will be given to you as cash.
How Much Can You Take Out?
With a cash-out refinance, a lender will typically lend up to 80 percent of the home’s value. Consequently, in order to qualify for a cash-out refinance, you will need at least 20 percent equity in your home. The funds from this can be used for any purpose. However, you will want to consider the reasons you are taking cash out of your home and the risks involved.
Consider Your Risks
Taking equity out of your home can be a double-edged sword. If you are using these funds to improve your home, make repairs or renovations, it usually makes economic sense because you are probably increasing the value of your home and will see those additional profits at the time you sell. Paying credit card debt can ease financial burdens because consumer and credit card debt is at larger interest rates than mortgage interest and mortgage interest is tax deductible. Consolidating these debts make them more manageable.
But if you are considering using funds from a cash-out refinance to take a vacation or buy a car, for instance, you want to consider the big picture. A car loan or consumer loan can impact your credit if you are unable to make your payments but if you are unable to pay your mortgage, you stand to lose your home to foreclosure. Are you willing to take that risk?
Consider Your Costs
You also want to keep in mind that a refinance is a whole new mortgage. You will be paying a new set of costs and fees that can be from 3 percent to 6 percent of the new mortgage amount as well as starting over again with another 30 or 15-year mortgage term.
A cash-out mortgage is a great option for some homeowners in some cases. If you have questions, we would be glad to help. Call the mortgage experts at (954) 359-3000 for a no-cost consultation.