The concept of mortgage refinance if not a new idea to many homeowners. The general idea is, when the time is right, you can apply to refinance your home loan, for better rates and terms, so that you end up saving money.
A cash out refinance is a special refinance option. Like a conventional refinance, you can lower your interest rates, or change the terms of your loan, but with one extra perk- you can get some extra money into your bank account now.
With this type of process, you take out a new loan, which is larger than the one you have now, pay off your existing mortgage, and then get to keep the rest of the cash to use as you like.
Why not kill two birds with one stone? If you need a little extra help to pay some bills, renovate your home, buy a new car, or pay for your child’s education, this might be your best option. To find out more specifics, read on.
How Cash Out Refinance Works
The best way to explain how cash out refinance works is with an example.
Let’s say you still owe $100,000 on your house and it is currently valued at $150,000. You can do a cash- out refinance to get a $$130,000 mortgage. You are borrowing the extra money against your home’s equity. From the $130,000 you will use $100,000 to repay your existing mortgage loan and then pocket the remaining $30,000.
Use the money from your cash out refi to make home improvements, pay off your debt, healthcare, education, or however you like. There are no restrictions on how you use the money.
In contrast to cash out refinance, rate-and- term refinance, the other popular option for refinancing, only replaces your current loan with a new one that has low-interest rates and relaxed lending term. You do not receive any cash with this option. Talk to one of our experts today to see which option works best for your personal situation.
Why Cash Out Refinance Might Be Good for You
Besides just the cash in your pocket, there are other benefits of cash our refinance that you can take advantage of.
- Lower interest rate
Like any other type of refinance, cash out refinance lowers your interest rate. The lower rates should reduce your monthly mortgage payments and help you save.
- Home improvement
A considerable portion of homeowners use a cash-out refinance option for home improvement projects.If you feel your home needs some repairs and renovation, but you don’t have the funds at hand, this is one easy way to get some. The good thing is that you will still be increasing your home’s equity in doing so, and will be able to sell it for more, if you ever decide to do so.
- Debt consolidation
You can also use the money from a cash out refi to for debt consolidation. Use the money to pay off high-interest credit cards. With this option, you can stick with one mortgage instead of taking out a second mortgage and having more to keep track of.
- Improving credit score
If you use the money from your refi to pay off some debts, your credit score will increase. A better credit score means that you will be able to refinance again in the future for an even lower interest rate. It takes money to save money in this case.
Before you apply, make sure this is the best option for you. At Main Street lenders, we know it all starts with a home loan, but we want to make sure you’re getting the right one.
Talk to your lender to see if the amount you will save, with your lowered interest rates, will offset the cost of refinancing. Keep in mind, you’ll be looking at a 3%-6% cost of the total loan in fees. It is also wise to consider how much equity you want to keep in your home. The more you borrow against it, the less you’ll profit if you ever decide to sell the house.
Cash Out Refinance FAQs
- Can I do a cash out refinance if I have fully paid for my home?
Yes, many lenders will allow you to refinance your house with a new loan even if you don’t have a current one.
- How does cash out refinance work?
Essentially you get a larger loan amount than you currently owe on your house. The new loan is used to pay off your existing mortgage, closing cost, and fees. The amount left over is distributed to you to keep and spend as you wish.
- Can I do a cash out refinance on a VA loan?
Yes, you can refinance a VA loan. If you are eligible, you can do up to 100% refinance, unlike other loans that allow only up to 85%.
- I live in Texas, can I do a cash out refinance?
Yes, but Texas has unique cash out refinance laws. For example, there are no VA loans in the state, and you can only refinance up to 80% of your house’s value.
- Home equity vs. cash out refinance, what’s the difference?
While a cash out refinance will replace your existing mortgage, a home equity loan will act as an additional loan on top of the one you already have. Also, refinancing usually has lower interest rates compared to home equity loans.
- What are the current cash out refinance limits?
Most lenders allow conventional mortgage holders to do a cash out refinance for up to 75% of their home’s value. That means if your home is worth $150,000 you should be able to take out up to $112,500. FHA mortgages have a higher LTV of 85% while VA loans go up to 100%.
- Is a cash out refinance tax deductible?
The general rule is that the proceeds from a cash out refi are not income. Therefore they are not tax-deductible.
- Can I do cash out refinance for an investment property?
Yes, most cash out refinance lenders will allow you to do refinancing for both investment and rental properties. Some even allow refinancing for vacation or second homes. But in most cases, you can only do up to a 75% refinance.
- How long should I wait before I refinance?
This one varies from one lender to another, and also by region. In some cases, you can do a cash out refinance after owning a home for only six months, but in other cases, you might have to wait for at least 12 months.
If you have any more questions and want to know if this is the right option for you, TJC Mortgage would be more than happy to provide the answers. Let’s work together to see how we can get the most money into your pocket.
Disclosure: Even though a lower interest rate can have a profound effect on monthly payments and potentially save you thousands of dollars per year, the results of such refinancing may result in higher total finance charges over the life of the loan.