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What Is Cash-Out Refinancing?
Cash-out refinancing is a method of taking advantage of the equity you have built in your home through a larger mortgage loan with a cash difference that you can put in the bank or use right away! Unlike most traditional refinancing which strictly look to lower your interest rate, cash-out can offer you even more flexibility for a major expense or a new investment you want funding for. Also uniquely, depending on your situation, VA 100 cash out refinance loan or similar programs, for veterans and some service members, allows you to access equity in the home while possibly taking out as much equity in your home as you may be able to 100%, based on the loan terms & rates! Thinking of cash-out refinancing can achieve various financial goals, whether its expenses: (appliance, home, personal), debts: (debt consolidation, emergency coverages), or just life events: (catching up during an unexpected hardship).
Common Reasons Homeowners Choose Cash-Out Refinance
Cash-out refinancing is often a practical and strategic move for responsible homeowners. One of the most popular uses of cash from a cash-out refinance is for renovations or updating homes and home spaces. Note that renovations can be increasing the value of a kitchen or laundy, or it can be enabling and increasing the comfort and functionality of some rooms and spaces in your house. Other uses of cash-out refinancing include consolidating high-interest debt, usually high interest credit cards or personal loans into one payment with a lower interest, and many people use the money from a cash-out refinance to finance education and/or medical expenses. Some skilled and pioneering homeowners have launched businesses and start-ups by accessing equity in their homes – we want more in terms of home-businesses. According to The New York Times, it cannot hurt your financing to learn about the current market situation, because oil and energy prices ebb and flow, rates go up, and home prices ebb and flow.
Basic Qualifications and Requirements
Lenders usually require the borrower to show steady income, good credit history and at least 20% equity in the property, although other programs – like for veterans – allow higher loan-to-value ratios. Some other considerations you should think about are your current debt-to-income ratio and the appraised value of the property. Getting your financial documents ready and learning about your lender’s specific guidelines can make the qualification process smoother.
Steps Involved in a Cash-Out Refinance
- Evaluate your home equity and your credit situation.
- Reach out with multiple lenders and compare offers, rates, terms and closing costs with each lender.
- Gather documents like pay stubs, taxes, and statements.
- Submit an application and schedule an appraisal to establish the value of the home.
- Once you are approved your loan will close and you will receive the cash.
Getting ahead of the paperwork, and knowing how the process works, can minimize delays and ensure you obtain the best possible terms possible.
Benefits and Potential Risks
The biggest benefit of cash-out refinancing is the opportunity to acquire a bundle of cash at usually lower interest rates compared to an unsecured loan or credit card. Not only can you use the funds to invest wisely in your home or other financial priorities, but you would also be increasing the total principal on your mortgage, and possibly extending the payoff time and the total interest paid in the long run. Further, should housing prices decrease, the borrower could face being “underwater,” which occurs when the homeowner ends up owing more than the current market value of their home.
Alternatives to Cash-Out Refinancing
Homeowners might also consider other loan vehicles in addition to other options to access home equity. Home Equity loans allow you to access a single lump sum with a fixed interest rate, and Home Equity Lines of credit (HELOC) is typically a revolving line of credit that provides more flexibility and usually lower closing costs than a full refinance. There are different risks and benefits among each option, so considering any fees, borrowing limits, and the repayment structure will help determine the best option for your unique situation.
Final Thoughts
Cash-out refinancing provides homeowners with flexible access to their home equity to either enhance their finances, pay for an important renovation, or financial upheaval of unexpected life events. By becoming informed on the process, weighing the benefits and drawbacks, and following market conditions you can take control of your decisions that will help you create security over making decisions that reduce security. With appropriate planning, a trusted adviser, and wise timing it is possible to turn home equity into a significant contributor to constructing real financial flexibility.
