Are you seeking cash for a home improvement project? How about funds for educational expenses? What about a dream vacation?
In a perfect world, you’d have enough cash in the bank to handle anything that life brings your way.
However, as most people find out, this isn’t the case. Instead, they need to get creative about securing funds for life’s many financial wants and needs.
Fortunately, homeowners have a way of accessing such funds. Let’s look into what cash-out refinance is and the pros and cons.
What is cash-out refinancing?
A cash-out refinance involves getting a new mortgage loan with a balance that’s more than what you owe on your current mortgage.
The difference between your new loan amount and what you owe is the amount that is “cashed out” to you.
The advantages of cash-out refinancing
You won’t have to look far to find a long list of advantages associated with cash-out refinancing. Let’s look at four of the most impactful benefits.
1. Potential to lower your interest rate
It doesn’t matter if you’re interested in a cash-out or conventional refinance, you have the opportunity to secure a lower interest rate. And if that happens, you can save money on your monthly payment as well as over the course of your loan.
Before you decide on a cash-out refinance, contact a mortgage lender to learn more about cash-out refinance rates and what you qualify for. This will help you decide if you’re in a position to secure a lower rate.
2. You’re left with one loan and one payment
When you refinance your mortgage and take cash-out, you’re left with one loan and one monthly payment. But if you opt for a personal loan, home equity loan, or something similar, you’ll end up with two loans.
It’s more difficult to manage two loans, and it can also work against you in regards to how much interest you pay.
3. Access to a larger amount of money
When compared to other options, such as a personal loan, you can access a larger amount of money with a cash-out refinance. The more equity you have in your home, the more refinancing power you have, and the more that you can possibly cash-out.
4. Use it for debt consolidation
You can use the money from a cash-out refinance to consolidate high-interest debt such as credit cards. This has the potential to save you thousands of dollars in interest, while also making it easier to manage your debt load.
Disadvantages of cash-out refinancing
Despite the many benefits of a cash-out refinance, there are some potential drawbacks lurking. These include the following:
- Foreclosure risk: Since you’re using your home as collateral, there’s always a risk that you could lose it if you don’t say current with your payments.
- New terms: Your new mortgage terms will differ from your old terms. You hope that your terms are better, but that’s not always the case. Check and compare your interest rate and fees before deciding in favor of a cash-out refinance.
- Closing costs: There are usually closing costs associated with a cash-out refinance. Plan for somewhere in the range of two to five percent of the total loan.
- A time-consuming process: Since you’re getting a new mortgage, your lender needs to go through all of the underwriting steps. This includes an appraisal of your home. So, if you need money in a hurry — such as to make a home repair — a cash-out refinance may not be the right choice.
When is cash-out refinancing the right choice?
No two people are in the same situation, so there’s no easy way to say when cash-out refinancing is the right choice. Times when it may be the right decision include when you:
- Have at least 20% equity in your home
- Can refinance to a lower interest rate
- Can wait to receive funds
- Know exactly what you need the money for
- Have a good/excellent credit score
- Have a steady income
- Not bogged down by a large amount of unnecessary debt, such as credit card balances
If you’re on the fence, use a cash-out refinance calculator to better understand your current situation and what would happen if you proceed. Doing your homework upfront reduces the risk of a poor decision.
Cash-out refinancing requirements
Requirements vary from one lender to the next, so keep an open mind if you don’t receive approval the first time around.
Some of the most common requirements of a cash-out refinance loan include:
- Debt to income ratio (DTI): A DTI of 45 percent or less is ideal.
- Credit score: A credit score of 620 or higher will help you qualify for a cash-out refinance loan.
- Home equity: A minimum of 20 percent equity in your home is generally recommended.
- Waiting period: Your first loan must be a minimum of six months old before exploring a cash-out refinance.
Contact lenders directly to learn more about the specific requirements set forth by each one. This can help you decide if now’s the time to pursue a cash-out.
AAABanking can help you cash-out
There’s a lot to consider as you learn more about cash-out refinancing.
You need an experienced and knowledgeable team on your side. A team that can answer your questions, provide guidance, and help you move through the refinance process (if you decide to do so).
At AAABanking, our goal is to help you get exactly what you want when refinancing your home.