Cash-out refinancing is a mortgage refinance option that allows you to convert home equity into cash. When you receive a cash-out refinance, you pay your original mortgage and replace it with a new loan. This means that your new loan may take longer to pay off, your monthly payments may be different, or your interest rate may change. A cash-out refinance can provide a significant amount of money at attractive interest rates.
When you're short on cash but have equity in your home, refinancing provides you with a pool of money for home improvements, educational needs, and other goals. But the strategy is risky and it's worth evaluating the alternatives to see if there is a better option. It's logical to use home equity for housing projects that increase the market value of your home, as this will increase your net worth and make it easier to recover your investment when you sell your home. It's best to use the funds for “safe projects” that future buyers, not just you and your family, will value.
It's tempting to use home equity to start a business, and it's been done successfully, but it's also risky. With the high percentage of businesses that fail, you need to evaluate how you will repay the loan and how your family could be affected if your business does not generate income. The profits you make from a cash-out refinance will depend on the value of your home and how much you owe for it. You can generally take up to 80% of your net worth out of your home.
A cash-out refinancing is when you apply for a loan that is worth more than your previous mortgage balance and the difference is paid to you in cash. Credit requirements tend to be more stringent for cash-out refinances compared to original home loans. Paying off all of your credit cards with a cashout refinance can increase your credit score by lowering your credit utilization ratio (the amount of available credit you're using). A cash out refinance should not be approached with the same indifference as when opening a Macy's credit card. Getting cash using your home equity can be an easy way to get funds for emergencies, expenses and needs. Whether it's a lot of drained credit cards or a high-interest payday loan where you unknowingly decided to roll the dice, a cash-out refinance can help you get out of a predicament.
Conversely, with a cash-out refinance, you get a new loan for more than you owe on your current mortgage. Like other refinancing programs, a cash-out refinance replaces your current home loan with a new home loan, usually at a lower interest rate. With a cash refinance, you'll pay the same interest rate on your current mortgage principal and the lump sum principal payment. By refinancing a mortgage, you may be able to lower your monthly mortgage payments, negotiate a lower interest rate, renegotiate periodic loan terms, remove or add borrowers from the loan obligation, and access cash from your home's equity. If you can get money out of your house for a good purpose and lower your interest rate at the same time, you can really put your equity to work. Home Equity Loans and Home Equity Lines of Credit (HELOC) are alternatives to refinancing mortgages with retirement or non-cash out (or rate and term).
The new mortgage pays off your old mortgage, then you get the difference between the two, minus closing costs, in cash. If your cash out refinance can't generate enough cash to buy a second home, ask for a 20% down payment on the new home so you don't have to pay private mortgage insurance (PMI) premiums.