With a cash-out refinance you can use the equity in your home to get cash back.
But when are cash out refinances a good idea? And who qualifies?
We will answer these questions and more in this article.
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What is a cash-out refinance?
A cash-out refinance replaces your existing mortgage. Plus gives you cash back up to 80% of the value of the property.
In order to qualify for a cash-out refi you will need to have at least a 30% equity stake in the property. The new loan can be for up to 80% LTV. The difference can be given to you as cash.
For example: Your home is worth $300,000 and your mortgage balance is $150,000. The LTV ratio is 50%. You would be able to get $90,000 cash back with a total loan balance of $240,000, or 80% LTV.
When is a cash-out refinance a good idea?
Usually a cash-out refinance is a good idea if you plan on using the cash you receive to reinvest into the home. Making upgrades or repairs that can increase the value of your home are a great investment.
Many people use a cash back refinance to pay off debt or to make large purchases, but this can back-fire. If you pay off credit card debt using a cash-out refi, you are turning that unsecured debt into debt that’s secured by your home.
If anything were to happen and you cannot afford to pay the payment, you now could possibly lose your home. While if a financial hardship were to happen and you couldn’t pay your credit cards your home would be safe.
Cash-out Refinance Pros and Cons
- Get cash at a lower rate than other types of loans
- Pay off student loans or other types of debts
- Pay off high interest credit cards
- Renovate and make home repairs
- Payments are tax deductible
- Closing costs added onto the loan
- Lose equity in your home
- Home at a greater risk
- Less favorable loan terms
Why people like them..
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.
Cash Out Refinance Tax Implications
One of the benefits of a mortgage is that the interest is tax deductible. When you choose to do a cash out refinance the same applies. The interest paid on the cash received is also tax deductible. You’ll have only one monthly mortgage payment to make.
Lower your interest rate
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 lower interest rate can cut the overall cost of the loan enough that even taking out cash, the overall amount owed can decrease.
With interest rates still at all time lows, now is a great time to refinance your home and lock in a new low rate.
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.
- Spend cash as you please
- You can take care of major expenses
- One mortgage payment
- Lower mortgage payment
- Cash out refinance has a lower rate than HELOC
- 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.
Cash-out refinance requirements
- 640 credit score
- No recent late payments (No late past 12 months)
- At least a 70% LTV or lower
- 2 years of provable income
- 2 years of tax returns
Home Equity and HELOC Loans
Home equity and HELOC loans are another type of mortgage refinance product that uses the equity in your home as collateral to loan you cash. The main differences between a cash out refinance and a HELOC is that a home equity loan is a second mortgage requiring a separate monthly payment, and is not tax deductible. Home equity loans are more difficult to qualify for and require a higher credit score, typically a 680 credit score is required.
Cash out refinances make up a third of all refinances. This number is way down from 89% in 2006.
Chart curtesy of BankRate.com
Cash-out refinances are a great way to get cash back using the built up equity in your home. You can use this cash for anything you like. But be careful with what you spend the money on. Paying off debt turns unsecured debts like credit cards and student loans into secured debt with your home as collateral.
Using cash-out refis to make home improvements or repairs that will increase the value of your property is recommended. Whatever you decide to do make sure you are fully informed of the costs and options available to you. Speaking to an experience loan officer who can help guide you through the process is always recommended. Like with any loan you should compare multiple lenders.
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