Homeowners’ wealth has reached
$13.9 trillion in mid 2017, according to CoreLogic. This is $0.5 trillion more than its peak in 2006 and is double the trough of $6 trillion during the Great Recession. One way to
tap this equity and get money out of your home is a cash-out refinance.
You can use proceeds from a cash-out refinance for debt consolidation, home improvement and university tuition, among other purposes. Cashing in on this home equity has its benefits and considerations, of course.
When is that right time for a cash-out refi? Let’s try to weigh the pros and cons of this type of refinance.
Let’s help you find a lender, too.
Understanding Cash-out Refinance
By a cash-out refinance, you replace your existing loan with a new mortgage and take cash out of your home.
It’s like this: you borrow money to pay off your existing mortgage balance of $80,000 on a $100,000 home. You can then “take cash out” of $20,000 to be rolled into your loan amount. In all, your loan amount is $100,000 with the $20,000 received as cash at closing.
The $20K becomes your money out of your equity, which is the difference between the current value of your home and the unpaid balance of your current loan.
Lenders generally require this loan-to-value ratio to be at least 80% as in the example. Some
nonprime loans may allow you to borrow beyond that level.
Purposes of Cash-out Refinancing
There are no rules regarding how the money from the cash-out loan is to be spent. Most often, the proceeds go to home improvements.
Other homeowners opt to use this cash to pay off their debts with high interest rates such as credit cards. While rates on credit cards depend on the type, they can still go
20% upwards. Imagine consolidating this debt with your mortgage with a rate around 4.%!
Shop and compare rates here.
Some fund their kids’ tuition or their family vacation using their cash-out proceeds. For real estate investors, they use the money as down payment on a rental property.
Best Time for a Cash-out Refi?
With regular refinancing that booms when rates go down, cash-out refinances are ideal when home prices go up. This increases home values and speeds up the buildup of equity in homes.
If you have accumulated substantial equity in your home, you may be eligible for a cash-out refinance. With rates historically low, that’s an added reason to pull equity out of your home.
Every loan program has its own cash-out rules, particularly the LTV requirement.
FHA loans, for instance, offer a cash-out refinance of up to 85% LTV. VA loans for veterans can cash out up to 100% of the home’s value. That’s why it pays to shop around for loans.
If there’s one major consideration in any cash-out loan, it is adding an unsecured debt to a secured debt, which is your mortgage.
Consider which is better: to continue paying your credit card debt at higher rates or roll this debt into your mortgage that you’ll have to repay for a longer time.
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