What Is A Cash Out Refinance? How To Do It Right.
Cash-out refinancing allows you to borrow against the equity in your house. This type of loan can be used for almost any reason, including, but not limited to:
- Debt Consolidation
- Education Expenses
- Home Improvements and Renovations
- Putting in a Swimming Pool
- Vacations
- Weddings and Graduations
- Divorce
- Purchase a Car, Boat, or Other Recreational Vehicle
- Start a Business
- Fund an Existing Business
- Investments
- Retirement (Reverse Mortgage)
Understand The Basics Of A cash-out Refinance Loan.
Cash-out refinance loans are when a homeowner refinances their existing mortgage loan for more than what they owe on their home. The additional funds can be used for nearly anything and are what gives the cash-out refinance its name. You are converting equity you earned through home appreciation and paying down your mortgage into cash.
After you’ve shopped around for rates and terms, the mortgage lender you’ve chosen will pre-approve you and order an appraisal of your home. Once a value is determined, the amount of home equity you have available is calculated by subtracting your mortgage plus any other home equity or liens on your property from the appraised value. How much you are permitted to “take out” is dependent upon which type of loan you are refinancing to and your loan profile.
Know When To Apply For One.
If you decide to apply for a cash-out refi, make sure you understand what you will need to pay back. This includes any fees associated with the application process. Also, consider whether you would rather use the money for other purposes than paying off your current mortgage.
Remember, you are increasing your mortgage balance, so your payment will likely be higher than what you’ve been paying. Also, your new interest rate may be lower or higher than your current mortgage rate. This will impact your payment as well.
Cash-out refinances often are motivated by reasons other than a low rate and low payment, so even though the interest rate could be higher on your new loan, a cash-out refinance will often still make sense.
For example, if you are paying off a large amount of high interest credit card debt with a cash-out refinance, chances are the numbers make sense even if your mortgage rate goes up.
Decide Whether You Want An Adjustable Rate Mortgage Or Fixed Rate.
There are two main types of mortgages available today: fixed rate and adjustable rate. With a fixed rate mortgage, your interest rate stays the same throughout the life of your loan. However, with an adjustable rate mortgage (ARM), your interest rate changes periodically based on market rates.
ARMs have become more popular in recent months as mortgage rates have increased. It’s important to speak with your lender about the pros and cons to adjustable rates. They often make sense if you have plans to sell or pay your mortgage off prior to the adjustment period, which is usually three to ten years.
Determine Which Type Of Loan Is Best For You.
In order to determine whether a fixed rate or ARM is better suited for you, you need to consider several things. First, you should calculate what your current monthly payment will be after refinancing. Then, you should compare that number to the payments on your current loan. Finally, you should factor in any potential savings you might see by switching to a lower rate.
Choose The Right Lender.
As with mortgage loans used to purchase homes, there are options when it comes to cash-out refinancing. Most people will use a conventional loan refinance. However, FHA may be an option. If you are an eligible veteran or active duty military, VA cash-out refinance loans often provide the most competitive rates with maximum flexibility.
Get matched with lenders who meet your cash-out refinancing objectives.
