Cash-Out Refinance

Refinancing your home means you are swapping your current mortgage loan for another one. There are several reasons people do this, such as getting better loan terms, paying off debt, and obtaining money for a large purchase.

Cash-out refinances are what you would use to obtain money to fund a significant bill like home renovations or pay off credit card debt. If you have enough equity in your home, you can get cash from one of these refinance loans. But, just because you’re able to get a cash-out refinance doesn’t mean you necessarily should.

Let’s look closer at these types of refinance loans to help you decide if you’re making the right move.

What is a Cash-Out Refinance?

A cash-out refinance loan refinances your mortgage loan for more than what you owe. The difference between what you owe on your house and the extra funds go to you at closing. However, if you are paying off debt, the creditors will get the remaining amount. You must have equity (usually at least 20%) in your home before attempting one of these loans.

Let’s get to the nitty-gritty details of how these loans work.

How it Works

As an example, you currently owe $100,000. After living in your home for a few years, you have $75,000 built up in equity. So, you want to spend $30,000 in home renovations. Therefore, you would take out the loan for $130k. After paying off the value of your home, you will then receive the remaining balance to use for your expenses.

Just like obtaining any loan, you must prove that you can make the payments on the new loan by providing proper documentation. Look around for a lender that offers you the best rates. You’re under no obligation to refinance through the same mortgage company.


So, why should you do a cash-out refinance?

There are some excellent reasons to do a cash-out refinance that can be beneficial to you and your way of life.

  • Lower Interest rates: Normally, mortgage refinances offer lower interest rates than home equity lines of credit or home equity loans. If you purchased your house when rates were sky-high, then there is a good chance that they will be lower in the future. However, if this is your reason and you don’t need the extra cash, then regular refinancing might be the better option.
  • Debt Consolidation: A lot of people use the cash they obtain from the cash-out refinance to pay off credit cards or other forms of high-interest debt.
  • Higher Credit Score: This form of refinancing can improve your credit score when you use the extra money to consolidate your credit cards and other types of debt in full.
  • Tax Deductions: Your mortgage interest payments qualify you for a tax deduction, unlike credit card interest. That means that a cash-out refinance may reduce your taxable income and increase your tax refund.

These types of refinances won’t benefit everyone and can do damage to your credit if you’re not prepared.

Know the Risks

Before making any major decision, like refinancing your home, you need to make sure that you know what you’re about to do. Be aware of all the elements of your loan.
  • Foreclosure Risk: For any type of mortgage loan you take out, your home is the collateral. So, if you fail to make the installments, you could risk losing it to the bank in what is called a foreclosure.
  • New Terms: You new mortgage will have a different set of terms than the original loan. Before you agree to them, double check the interest rates and fees. 
  • Closing Costs: As with any refinance, cash-out refinance loans require you to pay closing costs. They usually are three to six percent of your mortgage.
  • Private Mortgage Insurance (PMI): Private mortgage insurance protects a lender from a buyer that may be subject to default on the loan. If you borrow more than 80% of your home’s value, then you’ll have to maintain PMI.

Cash-out refinance loans can be helpful to someone who needs to obtain money for debt consolidation or a significant purchase. However, there may be other types of advances that make more sense for your situation. Do your research and speak with a professional about how a cash-out will affect you.

Contact Twin City Lending to speak with a lender about what loan options are best for your wants and needs. We aspire to assist you in meeting your goals and making your dreams come true.

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