Are you interested in making a home upgrade or consolidating debt? A cash-out refinance may be a good option to fund your financial goals while making your equity work for you.
What is a cash-out refinance?
A cash-out refinance is a loan on a property you already own that helps you use some of the equity you’ve built up in your home when you need it most.
When you take out a mortgage on a property and begin to make payments, the amount owed on the loan goes down while your equity in the property increases. This means you own a little bit more of your home with every mortgage payment you make.
With a cash-out refinance, you replace your existing mortgage with a new one that has a higher amount owed and pocket most of the difference.
Let’s say your home is worth $240,000, and the balance remaining on your mortgage is $115,000. That means you have $125,000 of equity in your home. With a cash-out refinance, you could refinance the $115,000 balance into a new $190,000 loan and receive $75,000 minus closing costs after the transaction is complete.
A cash-out refinance may be a good option to consider when:
- Your home’s value increases significantly and interest rates are low
- You want to renovate or upgrade your property
- You’re interested in expanding your investment portfolio
- You want to consolidate debt or cover an unexpected financial burden.
Pros and cons of a cash-out
A cash-out refinance can be a great tool to help you meet your goals, but there are a few potential drawbacks to consider as well.
- Generally, you have access to a larger number of different loan programs (i.e. fixed and variable rate options) compared with other home equity loan programs.
- You have just one mortgage payment to make versus two payments
- They offer stable, fixed interest rate options in addition to adjustable-rate options
- There are no limitations or restrictions on how the cash can be used after closing
- You may be eligible for possible tax deductions if the money funds significant home improvements (Consult your tax advisor to be sure.)
- They may require more documentation and take longer than getting a Home Equity Line of Credit (HELOC)
- You have to pay closing costs that eat into the equity you have available
- You may have an added cost in the form of private mortgage insurance (PMI) if your new mortgage balance is more than 80% of your home’s value
Ready to get started?
Contact your mortgage loan officer to learn more about a cash-out refinance.