May 22nd, 2019 8:29 AM by Jackie A. Graves
refinance is another option homeowners can consider when they are seeking
additional money for renovations or to pay down their debt.
refinance is when a consumer refinances a mortgage into a new one that has a
larger amount. The difference between the two mortgages is given to the
homeowner in cash. These mortgages are often called a “cash-out refi.”
need at least 20 percent equity in the home to qualify. This option can be
beneficial to consumers who have seen the value of their home rise in recent
refinancing is attractive to homeowners that are home rich, but cash poor – in
other words, they have too much of their wealth tied up in the home and not
enough in liquid assets,” says Greg McBride, CFA, chief financial analyst for
money from the cash-out refi and putting it towards paying down high-interest
debt or home repairs can be a financially sound decision.
This type of
refinancing can also be attractive when interest rates are low and the money is
invested “prudently over a long time frame, such as in a portfolio of quality
dividend-paying blue chip stocks,” he says.
money to buy disposable items that lose monetary value quickly is not
recommended by financial experts.
“It is a very
poor use of the money when it is put towards consumption – whether it is
vacations, home furnishings or other rapidly depreciating assets such as an
automobile,” McBride says.
amount of money you borrow in case real estate values decline and you need to
move, downsize or want to sell your home soon and can’t afford to wait for
prices to rise again.
“If you do a
cash-out mortgage refinancing, always leave yourself a healthy equity cushion
as a margin of safety,” he says. “Maintaining a 20 percent equity cushion gives
you some protection from home price declines that coincide with that future
point when you’re trying to sell the home.”
refinance allows a homeowner to tap into their home equity by borrowing more
than what they owe and is a common choice. Of the 483,000 refinances in the
fourth quarter of 2018, some 82 percent were cash-outs – the since the peak of
84 percent in 2006, according to Black Knight Financial Services.
is an example of how a cash-out refi works
The value of
your home has been increasing and now you only owe $80,000 while the house is
that refinancing your current mortgage means you can obtain a lower interest
rate and receive some money to make repairs and updates throughout your house.
$50,000 in cash for your project, you could refinance into a loan for $130,000.
The new mortgage includes the $80,000 loan balance and the $50,000 in cash.
to a cash-out refi
three other options you should consider before you start comparing rates on a
A home equity
line of credit or HELOC allows you to borrow money when you need to, which can
be useful if you are using the cash for a longer-term renovation project. The
interest rate is variable and changes with the prime rate.
A home equity
loan gives you a lump sum amount and the interest rate is fixed, which helps
homeowners budget for another monthly payment.
mortgage allows homeowners age 62 and up to draw cash from their homes and the
balance does not have to be repaid as long as the borrower lives in the home.
answers to frequently asked questions about cash-out refis.
What is a cash-out refinance?
refinance lets a homeowner swap their current mortgage into a new one, access
their equity and receive cash.
If you’ve lived
in your home for several years, it’s likely the value has risen, giving you
mortgage was $200,000 and after several years of payments, the principal amount
has declined to $150,000.
On the other
hand, a tax appraisal states your house is now worth $300,000.
refinances are conducted, lenders typically allow homeowners to borrow 70 to 80
percent of the home’s value. In this scenario, 80 percent of your $300,000 home
would be $240,000.
If you opt
for that maximum loan amount, you can “cash out” the difference between your
new $240,000 mortgage and the $150,000 balance on the old one and receive
Since you are
obtaining another mortgage, you will have to pay closing costs and fees, which
are typically 3 to 6 percent of the total mortgage amount. These costs can be
rolled into the new mortgage or the amount can be deducted from what you’ll be
cashing out in equity.
How does a cash-out refinance work?
from a cash-out refinance can be used for any purpose. The two most popular
reasons homeowners use their home equity is to pay for home improvement or
remodeling projects, pay down high-interest credit card debt or cover college
Reasons for a cash-out refinance
loans offer several advantages because you can receive a larger amount of money
in a lump sum. If interest rates have dropped since you received your initial
mortgage, you could save money on paying interest. The difference in interest
rates between mortgages and credit cards can be 10 to 20 percent less annually.
How much cash can I get?
typically allow homeowners to borrow up to 80 percent of the home’s value, the
threshold can vary, depending on your credit score and type of mortgage.
offer HHA cash-out refinance loans or refi loans that are insured by the
Federal Housing Administration will sometimes let you borrow as much as 85
percent of the value of the home. In addition, VA-backed cash-out refinance
loans are available for up to 100 percent of the home’s value.
What are the rates and fees?
refinance means you’re signing up for a new mortgage. The closing costs and
fees are typically 3 to 6 percent of the total mortgage amount.
and look for the lender which offers the lowest rate, depending on your credit
What are the risks?
the equity in your home to finance home repairs or upgrades can make economic
sense because it will boost the value of your home when you want to sell it,
getting a cash-out refi to pay off credit card or take a vacation is not
a good move.
If you lose
your job and are unable to make payments on your credit card, the lenders do
not have any collateral to take.
choose a cash-out refi, the collateral is your home. The lender can foreclose
on it if you fail to make payments.
starting the clock again on your mortgage, which means you could be making
payments all over again on a 30-year mortgage. A loan calculator will help you determine
the total interest cost of that added debt versus another option. A
shorter-term, higher-rate loan could mean paying less in interest overall
compared with taking three decades to repay a mortgage with a low interest
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