You've probably heard the term "cash-out refinance" before. Maybe your neighbor used one to pay for their room addition or buy an RV for your new way of vacationing.
Whatever the reason, you can leverage the equity you have built by owning your home, which can help pay for things like home renovation, education, pay off existing debt, or even use as seed money to start a new business.
How do they work, though? And are you eligible for one yourself? Those are questions you may be less clear on - and we're here to help.
Cash-out Refinance Basics
At its simplest, a cash-out refinance is a new mortgage loan - just a bigger one than you have on your home currently.
Here's how it works:
- You take out a new loan for a larger amount than your current balance. As a general example, say you have $50,000 remaining on your current mortgage. You might take out a $100,000 loan in a cash-out refinance.
- You'll take the difference between those two loans in cash. In the above example, that'd be $50,000.
- Use those funds to cover whatever expenses you need - pay off debt, remodeling costs, tuition, medical bills, etc. There's no limit to what you can spend your cash on.
- Continue paying off your new mortgage loan month after month, just as you were doing before. Keep in mind your payment may be slightly different than before, depending on the rates and terms offered.
Cash-out refinancing is usually best used when you've built up a good amount of equity in the home - meaning you've paid off some of your existing mortgage and you own a decent chunk of the property yourself. Or, in a more unfortunate example, your credit card or other revolving debt has gotten out of hand. You can look to refinance and leverage a low-interest rate that is tax-deductible to lower the monthly outgo, relieving some of the pressure in your day-to-day life that builds over time with a lot of revolving debt.
In the grand scheme of things, the more home you own, the more cash you can access via refinancing.
Other Things to Know About Cash-Out Refinances
Refinances are processed just like your initial mortgage loan was. You'll need to apply, prove your income and employment, provide various financial documentation, and have your credit report pulled. All these factors will influence the amount of money you can take out, as well as the interest rate your new loan will come with.
Another important thing to keep in mind is that you don't have to use your existing mortgage lender when refinancing. If you're considering a cash-out refinance, make sure to evaluate all your options.
Please contact one of our seasoned loan officers for more information at 888-297-7227 or click the apply button above.
Written by: Patricia Eubanks, Vice President