With home values soaring and interest rates still low, many homeowners are taking advantage of today’s market conditions by refinancing their mortgage loans. In certain situations, another option to consider is a cash-out refinance.
What is a Cash-Out Refinance?
When you have a good amount of equity built up in your property, you may want to think about cashing out some of that money when you refinance. Usually, at least 20 percent equity is required to be eligible for a cash-out option.
A cash-out refinance allows you to refinance your loan for more than you currently owe. You are taking advantage of the equity you have in order to take out cash that you can use for other expenses (paying off credit cards or car loans, putting money toward home renovations and upgrades, investments, and so forth). Using the cash for home renovations or energy-efficiency upgrades is a great idea because you are then adding more value into the home. You can think of that as an investment.
For example, let’s say you bought your house for $500,000 several years ago. Assuming you put 20% down, you may owe $375,000 on your mortgage loan. However, your property might now appraise for $600,000. A cash-out refinance means you could refinance into a new loan @$450k (75% loan to value) amount at the same or possibly a lower interest rate. You’ll be cashing out $75,000 that you can use elsewhere and you’ll still be in good shape with the remaining equity. And you would also leverage your tax deduction since you can write off all the mortgage interest. Of course, this is just a hypothetical scenario, so you want to get an accurate home evaluation and discuss your situation with a mortgage expert at Transparent Mortgage.
Don’t Overextend Yourself
When it comes to all mortgage loans, you have to be careful not to overextend yourself. In other words, don’t sign on for more than you can really afford. This is especially true in a cash-out refinance. It can be tempting to want to take out as much money as you can. At Transparent Mortgage, we always recommend that homeowners don’t take out any more than they absolutely need during a cash-out refinance. Remember that money will be factored into the new loan and will have to be paid back over time with interest, so you want to look at every factor before deciding on what amount to take out.
Alternatives to Consider
A cash-out refinance makes sense if the conditions are right and you have ample equity. A standard refinance will also save you money over time. You can reduce your monthly payments with a new loan and/or shorten the length of your mortgage. This may include turning your 30-year fixed mortgage into a 15-year loan and enabling you to pay off your mortgage faster. These options can put more money in your pocket in the long run. It just won’t be a lump sum.
If you need or want a large amount of money now, you can also leverage your equity into a home equity line of credit or a home equity loan.
What is the Best Refinance Option for You?
Refinancing a mortgage is not a one-size-fits-all solution. There are many options to review and all your financial factors should be taken into consideration. That’s why you should discuss your refinancing options with a mortgage professional and make the right decisions for your financial future.
The mortgage experts at Transparent Mortgage will walk you through all your home refinancing options and find the right loan for your homeownership situation. If you have questions about a cash-out refinance or any mortgage refinance needs, call us today at (619) 929-0199.