The process of cash-out refinance is simply a financial decision that allows homeowners to tap into the equity in their homes. What’s more, it is a great way to make that money work for you, whether through debt consolidation, home improvements, or other financial needs. By carefully considering your financial situation and goals, you can determine if it is right for you.
How Does A Cash-Out Refinance Work?
A cash-out refinance works similarly to any other home loan. You find and select a mortgage lender, fill out a loan application, and be considered eligible by your assets income, and credit. Here are some other steps included in how a cash-out refinance loan works:
- You must qualify for a higher loan amount: your lender will need to verify your income ability to afford the large loan amount that you will be going for.
- You will also pay for a home appraisal: You will only receive estimates of what your cash-out refinance loan amount will be. This will be resolved by paying for a home appraisal.
- Your cash-out loan amount is finalized: Once your appraisal is completed, your lender will calculate your cash-out amount.
- Your old loan is paid off: Once you sign the closing papers, your lender will finally fund your loan. Your old mortgage will be paid off and the new one is secured by your home.
Is A Cash-Out Refinance Right For You?
Cash-out refinancing is one of the cheapest ways that you can pay for large expenses, as borrowers can afford the refinance rates. Here are ways that a cash-out refinance helps people take on little risks:
Investments: You could actually purchase an investment property using a cash-out refinance so efficiently.
Home improvement projects: Also, you could make use of a cash-out refinance to easily renovate your home or simply add an addition.
College Education: When you tap into your home equity, you could also make use of the cash to pay for college especially if the refinance rate is lower than the rate for a student loan.
High-interest debt consolidation: Usually, the rate of refinance tends to be lower than other forms of debt like credit cards. Hence, you could use a cash-out refinance to pay off those debts and repay the loan with a lower-cost monthly payment.
These are some solutions that cash-out refinance can solve and it is up to you to decide how right it is for your solution.
Requirements To Be Considered Eligible
There are certain requirements that you will need to qualify for to be eligible for a cash-out refinance. Here are the requirements needed to qualify:
- Equity: Most lenders want you to have at least 20% in your home equity. This means that you own at least one-fifth of your home outright or in some cases, lower.
- Debt-to-income ratio: Your debt-to-income ratio is your monthly debt payments divided by your gross monthly income. What’s more, this percentage should be 43 percent or lower.
- Credit Score: Additionally, you will need a minimum credit score of 620 to be eligible for qualification.
- Seasoning: Most conventional refinance comes with a six-month seasoning requirement. Of course, this is only if you are seeking a VA or FHA refinance option. Also, the seasoning period is 210 days and 24 days respectively.
You need to fit into these requirements to be eligible for a cash-out refinance.
Benefits Of A Cash-Out Refinance
Many advantages cash-out refinancing offers which makes it an attractive option for most homeowners. Many of them include:
Lower Interest Rates
A cash-out refinance provides you an opportunity to secure a lower rate, even if the interest rates on the original loan have decreased. Furthermore, this can help lower your monthly payments and reduce the total interest paid over the loan term.
Potential Tax Benefits
Sometimes, the interest on your mortgage may eventually be tax-deductible. While the laws of tax vary, it could still be a potential benefit when using it for home-related expenses.
Access to cash
One of the best benefits that come with a cash-out refinance is the ability to access a large sum of cash. This could eventually be used for multiple purposes, like consolidating high-interest debt, education expenses, or home improvements.
Debt Consolidation
Most homeowners make use of the cash-out refinance to consolidate their high-interest debts, like credit card balances. Rolling these debts into your mortgage, you can easily benefit from a lower interest rate as well as a single monthly payment.
These are some of the pros and benefits of a cash-out refinance taken by most homeowners.
Cons Of Refinancing A Cash-Out
Here are some of the drawbacks you may face when you refinance a cash-out:
Closing costs: Refinancing a cash-out involves closing costs and they range from 2 to 5% of the loan amount. Now, these costs may add up, so you must factor it into your decision.
Extended loan term: To extend your loan term to keep your payments manageable, it may result in you paying more in interest. This is a possibility that may happen even if the interest rate is lower.
Higher Monthly Payments: Your monthly mortgage may increase depending on the terms of the new loan. It also depends on the loan amount you took out. So, it is important you can comfortably afford those payments to avoid the accumulation of more debt.
Risk of Foreclosure: Another con you face is putting your home at greater risk if you are unable to make the payments. This happens if you increase your mortgage balance, so you must be using the cash for non-essential expenses.
Frequently Asked Questions
Here are some frequently asked questions you can check out:
How much cash can I take out with a cash-out refinance?
The amount of loan you take out depends on what your home’s current value and the amount of equity you have. Some lenders allow you to borrow up to 80% of your home’s appraised value.
How long does it take to complete?
The whole process typically takes up to 30 to 45 days, which is similar to a standard mortgage refinance. This involves an appraisal of your home, underwriting, and the closing process.
Will a cash-out refinance affect my credit score?
The effect on your credit score depends on how you manage the new loan and the debts you pay off. Also, applying for the process will involve a hard inquiry on your credit report and this may temporarily lower your credit score.