The goal of most homeowners is to eventually become the sole owner of their property. However, as time passes and your mortgage debt increases, it may feel impossible to pay it off. Fortunately, cash-out refinancing may help you develop equity faster. Now let me explain how it works and why it could be a good idea for you.
What Is a Cash-Out Refinance?
Refinancing with cash out means taking out a new loan to pay off your current mortgage and getting the difference in cash. The amount of money you may get is determined by the amount of equity you have in your house, with most lenders allowing you to borrow up to 80% of the value of your property. A property worth $200,000 with a mortgage of $160,000 would qualify for a cash-out refinancing loan in the amount of $40,000.
Why Refinance Now?
If you’re happy with your current mortgage and don’t need the extra cash, you might be wondering why you would want to go through the hassle of refinancing. Here are a few reasons:
1. To take advantage of lower interest rates – Interest rates on cash-out refinances are usually lower than they are on home equity loans or lines of credit, making them a more cost-effective way to access extra cash.
2. To shorten the term of your loan – Refinancing into a shorter-term loan can help you save money on interest and pay off your mortgage faster. In our example above, refinancing from a 30-year mortgage to a 15-year loan would increase your monthly payments but could save you thousands in interest over the life of the loan.
3. To consolidate debt – If you’re struggling with high-interest debt, a cash-out refinance can help you pay it off faster. By using the equity in your home to get a lower rate on a new loan, you can potentially save money on interest and get out of debt sooner.
4. To make home improvements—Whether you’re looking to update your kitchen or add a new bathroom, a cash-out refinance can give you the funds you need to make home improvements. Just be sure to weigh the cost of the improvements against the value they’ll add to your home before taking out a loan.
Is refinancing right for you?
A cash-out refinance isn’t for everyone. Here are a few things to consider before you decide whether it’s the right move for you:
1. Your current interest rate – If interest rates have gone up since you took out your mortgage, refinancing may not make sense. You’ll want to compare your current rate to the new rates available to make sure refinancing will save you money.
2. How long do you plan to stay in your home: If you’re planning on selling your home soon, you may not recoup the cost of refinancing before you sell. On the other hand, if you plan on staying in your home for many years to come, the savings from refinancing could be worth it.
3. How much equity do you have: In order to qualify for a cash-out refinance, you’ll need to have enough equity in your home. If you don’t have at least 20% equity, you may not be able to get a loan or you may have to pay for private mortgage insurance (PMI), which would increase your monthly payments.
4. Are you prepared for a higher monthly payment? If you’re refinancing into a loan with a shorter term, your monthly payments will likely go up. Make sure you can afford the new payment before you commit to refinancing.
If you’re thinking about refinancing, be sure to compare offers from multiple lenders to find the best deal. And remember, a cash-out refinance is just one option for accessing your home equity. If you’re not looking to borrow a lot of money or you don’t have enough equity in your home, you may be able to get a home equity loan or line of credit instead.