Cash-out refinance loans are designed to replace an existing home mortgage. The best time to choose this type of loan is after you have built up equity in your home by paying your mortgage payments over the course of several years. Since you now owe less on your home, the new mortgage payment may be considerably less than the one you are paying now.
As a bonus, you get additional money on top of repaying the first loan. You can use this money any way you choose, whether to remodel, pay off credit card debt or even take a vacation.
Cash-out refinance loans allow you to access the equity in your home by refinancing the entire loan. This is different from a home equity loan, which is another loan in addition to your first mortgage.
After a cash-out refinance, you still have only one monthly mortgage payment to make, but when you get a home equity loan, you now have a first mortgage payment plus a second mortgage payment to make each month.
A cash-out mortgage loan is not always the best choice to accomplish your purposes. For instance, if your home is nearly paid off, it would not benefit you to start over with a new mortgage. At that point, the payments you are making on your first mortgage are going almost entirely on the principle of the loan.
If you did a cash-out refinance then, you would be starting over paying mostly interest with each payment. In that case, it would be better to choose a personal loan.
However, there are times when cash-out loans can help you get the cash you need while reducing your monthly payments. For example, if your first mortgage was made at a high interest rate, a new loan with a much lower interest rate can cut the overall cost of the loan enough that even taking out cash, the overall amount owed can decrease.
Benefits of a Cash-Out Refinance
By carefully assessing which type of loan is best suited to your needs, you can decide if a cash-out refinance loan is right for you. Here are some of the benefits of this type of loan.
- You get cash to spend as you please.
- You can take care of major expenses.
- You still only have one mortgage payment to make each month.
- You might have a lower mortgage payment.
- You can refinance with a lower interest rate than with a home equity loan.
- You can take advantage of lower interest rates that occur in the housing market.
Who Can Get a Cash-Out Refinance Loan?
Qualifying for a cash-out refinance loan is similar to qualifying for an initial mortgage. Your lender will consider the loan-to-value ratio, your credit score and the appraised value of the home when deciding whether to issue the loan. The loan-to-value ratio is figured by dividing the mortgage amount owed by the appraised value.
Typically, that figure must be less than 80%. You need a good credit rating to get the best interest rates, especially if your loan-to-value ratio is on the high end. You can also influence the appraised value is you are present during the appraisal and point out any improvements that have been made recently.
Are you considering a cash-out refinance? If so, we encourage you to fill out the form on our home page. It allows you to compare loans from lenders in our network and receive a free, no-hassle consultation as you consider your options.