The 5 Best Reasons to get that Cash-Out Refinance
What Should You Do with Your Cash-Out Refi?
Are you thinking of joining the millions of homeowners who have refinanced their home in 2020, but you’re not sure of the right reasons to do so, or even how to go about it? Even before the pandemic changed our economic landscape, many people took advantage of the strong housing marketing and historically low interest rates to refinance their current mortgage. The preceding months may have motivated even more for a variety of reasons:
Reducing their rate, and therefore the monthly payment
Reducing the loan term to pay off the home faster
Eliminate costly private mortgage insurance (PMI) that may have been required on original loan
Convert from an adjustable rate mortgage (ARM) to a fixed rate for more long-term stability
Refinance the mortgage to take cash out of the equity
How a Cash-Out Refinance Works
Today we’re going to focus on the popular – and potentially savvy – program: cash-out refinance. When you combine an increase of value in your home with a decrease in interest rates, you can replace your original mortgage with a new loan and pocket the difference in cash.
For example: if the balance of your home loan is $250,000 and the home is now worth $300,000, you can refinance for a new mortgage of $324,000 and receive the difference (minus closing costs and fees) of $24,000. Most lenders will require you leave 20% of equity in the home, so there is a limit of 80% to refinance – also known as the LTV or loan-to-value ratio.
Just as when you applied for the original purchase, you’ll need to provide the usual proof of income, credit report, and there will be a home inspection, although there will be some streamlining since you have an existing mortgage.
What Should You DO with a Cash-Out Refinance?
So, once you’ve assessed and determined the efficacy of refinancing your home, what should you do with the money drawn from the equity? That depends on your personal circumstances and goals, of course, but here are five great possibilities that could benefit you in the short or long run.
1 | Pay Down Credit Card Debt
Refinancing to consolidate debt can make financial sense when you compare interest rates. Many credit cards pull in more than 20% APR, while a secured home loan can be in the 3- or 4% interest rate range. By paying down the cards and taking that money to apply to your monthly principal, you can save thousands on your new loan. Be sure to keep those credit card balances low or at zero so you don’t undo the progress!
2 | Home Improvement Projects
Many of us don’t have cash on hand to tackle big projects around the house like a new deck or kitchen remodel, so using a cash-out refinance to cover the costs can solve that problem on two levels: use the equity money rather than building up more credit card debt, and potentially increase the value of your home for the future sale.
Lenders and real estate professionals can advise you on the projects that will provide more bang for your buck. These may include kitchens, bathrooms, new roofing, and various energy-efficient upgrades.
3 | Investment Property or Second Home
Real estate can be an excellent and robust addition to your portfolio. By using your cash-out from your current home, you can make a down payment on an investment property that will pay for itself over time.
Tired of looking at the same walls during the year of social isolation? It may be time to purchase that vacation home you’ve always dreamed of.
4 | Protect Your Business
Whether you have a start-up or own your long-term business, this year can make things feel financially precarious. By refinancing for cash-out now, you can provide a cushion before you need it and face possible business bumps that could make borrowing difficult in the future.
5 | Protect and/or Increase Your Financial Assets
It can be tempting to move or remove money from your investment portfolio when the economy is shaky, but there are risks involved. Cash from your home’s equity can avoid fees from early withdrawals and even increase your tax savings in IRAs and other programs. Diversifying can also provide a cushion in the event of a turn in the housing market. It’s always a good idea to confer with a trusted financial advisor first.
You’ll have your own personal objectives to consider for a cash-out refinance, but make sure the savings outweigh the costs. It’s typically not wise to use the money for big-ticket purchases like a car or a vacation, when the expense can’t be recouped. And if you don’t plan to stay in the home for very long, then a refinance could end up losing money (fees and closing costs) before you hit the breakeven point.
If you identify with any of the above five reasons, lenders like EnTrust Funding (ETF) can sit down and look at your goals, equity, and circumstances to answer your questions about cash-out refinancing. Contact us today for these and other mortgage solutions!