Cashing In on Your Home Equity with a Cash-Out Refi
When you own a home and faithfully pay your mortgage, whittling down the principle as you go, you’re essentially contributing to a large savings account with a roof. And sometimes it’s in your best interest to dip into that savings for varying reasons. That’s where refinancing comes in.
One of the best ways to tap the equity you’ve built in your home is called a cash-out refinance, which involves securing a new loan to replace your current mortgage that also includes a cash payout.
In 2018, more than 80% of home refinances were of the cash-out variety. Homeowners who have seen the value of their home rise in the strong economy and have at least 20% equity, are finding the option beneficial. As interest rates continue to drop, consumers are also taking advantage of reducing their rate with a new mortgage, resulting in lower monthly payments as well as the cash on hand.
For original FHA borrowers, a refinance can also mean eliminating mortgage insurance if there is still 20% equity in the home, further lowering their monthly payment. There are clearly several positives for taking the cash out. Here are some of the whys:
One of the most popular uses of a cash out refi is home improvements. With the right repairs and upgrades, you’re potentially increasing the value of the home for when it’s time to sell, which is like making your money back.
Consolidating debt can make sense when you compare the low interest rates on a mortgage compared to high rates on credit cards and personal loans. Just remember that a credit card loan is unsecured so the creditor can’t come after your house if you default on it.
Borrowing for education expenses can be strategically sound if the objective is to increase your earning power.
As more and more people enter the entrepreneurial field it can be tempting to borrow against your home to get a new business up and running. Again, because of the difference between interest rates, it can make sense since some banks may require the home as a guarantee on a business loan anyway. Just make sure to assess the risks until you turn a profit.
While the money is yours to do with as you will, financial experts caution against using cash-out on your home for consumables like a car or vacation that don’t benefit the borrower in the long run.
Running the Numbers
Depending on the amount of equity, type of mortgage, as well as your credit standing, homeowners can borrow up to 85% of the home’s value – 100% for veterans. You can borrow large amounts of money and qualify easier because the loan is secured by your home. There may also be tax advantages if you qualify for a deduction on the interest.
Let’s say you wanted $100,000 for a remodel project. If you still owed $200,000 on a home that is now worth $400,000 you would refinance a new mortgage for $300,000 – the amount you owed plus the cash out. If the upgrade to your home increases the value, and a lower rate decreases your monthly payment, then it can definitely be worth the investment.
Is it time to tap your equity? Here at EnTrust Funding (ETF), we know you have choices and are happy to answer your questions about cash-out refinancing and provide up-to-date and competitive rates. It’s our mission to provide you with the tools, guidance and support to ensure your success in the changing mortgage environment.