A cash-out refinance loan is an attractive option for many homeowners considering refinancing their homes.
It offers quite a few potential benefits to homeowners. But, it should not be done lightly.
In fact, you need to understand a few basic things about cash-out refinance loans and options before you take the plunge.
The better you understand the loan, your options, and what the cash out refinance rates today happen to be, you can make an informed decision about whether this is the right type of loan for you.
What Is a Cash-Out Refinance Loan?
The long and short of a cash-out refinance loan is that you refinance your existing mortgage for a sum that is greater than the total amount you owe on your existing mortgage.
Many homeowners do this, so they can cash out the equity in their homes to spend on other things, such as:
- Home improvements.
- Paying off debt.
- Buying a new car.
- Investment in a business.
- Paying medical bills.
You name it. The money is yours to do with as you please with this type of loan. Your home is the security for that additional money.
In order to qualify for a cash-out refinance loan, you will typically need 20 percent or more of equity in your home. Though some loans will allow you to cash out up to 90 percent of your home’s equity in a cash-out refinance.
Keep in mind that your new loan may be at a higher rate of interest than your existing loan and you will have to go through the standard approval process, including home inspection, appraisal, and closing costs.
If your new refinance loan brings you below 25 percent equity in your home, you will likely be required to purchase private mortgage insurance as well.
It is even possible to get cash out refinance rental property loans too.
While not as common and some lenders are reluctant to do so, it isn’t outside the realm of possibility. With the right lender, you can do a cash-out refinance rental property loan to put the equity in your rental property to work securing more rental properties for you and building out your investment portfolio.
When Is a Good Time to Consider a Cash-Out Refinance?
Considering that cash out refinance mortgage rates are typically higher than your standard mortgage rates, it isn’t always a good time to pursue this type of loan.
In fact, sometimes are definitely better than others.
Good times to consider a loan of this nature include the following:
- When you can improve your credit by doing so.
Using the funds to pay down higher interest credit cards and improving your credit utilization ratio at the same time is great for your credit and can be an ideal reason for cashing out the equity in your home (which has a much lower interest rate).
- When you’re seeking ways to reduce your taxable income.
Mortgage interest payments, unlike credit cards and auto loans, are tax deductible which can save you big at tax time.
- When you need home improvement.
Or you simply want to make updates to your home. It makes more sense, though, to fund a new roof at a lower interest payment associated with your mortgage than to attempt to pay for the roof with credit cards or another type of loan that offers higher interest rates.
- Paying for college tuition.
Whether you’re paying to educate yourself or your child, an investment in education is almost always a worthy one to make. It’s an excellent use of these funds even at higher cash-out out refinance mortgage rates.
Alternatives to Cash-Out Refinance Loans
Cash-out refinance loans offer some attractive benefits. But there are other options you might want to consider first, including:
- Home equity lines of credit (HELOC): Turn your home into a credit card so you can get funds you need for various expenses along the way.
- Home equity loans: Take out a lump sum loan with fixed interest using your home as collateral or security for that loan.
- Reverse mortgages: This type of mortgage is reserved for homeowners aged 62 and over and allows them to withdraw cash from their homes. This money never needs to be repaid as long as the borrower continues to live in the home.
Ultimately, the cash-out refinance loan is not the best loan for all situations.
That doesn’t mean it isn’t a good loan for your situation. Ideally, the funds gained by this type of loan would be put to good use to accomplish long-term goals that will ultimately save you money.
Understanding these basic facts will help you make wiser borrowing decisions.