Are you interested in refinancing your mortgage to access the equity in your home? Are you thinking about a cash-out refinance?
If you answered yes to these questions, you’re in the right place.
In this article, we discuss the many ways to use the funds from a cash-out refinance. Once you know your options, you can decide if it’s the best path for your financial situation.
How do cash-out refinance loans work?
A cash-out refinance is a type of refinancing in which you gain access to your equity with a lump sum cash payout.
As you continue to pay down your mortgage, you gain equity in your home. Equity is the amount of a home’s value that you’ve paid off.
For example, if your home is appraised at $300,000 and you have a $200,000 balance on your mortgage, your equity is $100,000.
You also build equity in your home if it increases in value. This is independent of the equity you build by paying down your mortgage balance.
Often confused with home equity loans, a cash-out refinance does not leave you with another monthly payment. Instead, the cash-out refinance replaces your existing mortgage, leaving you with one loan.
The cash-out refinance process will be similar to the process you went through for your original mortgage loan. You’ll need to meet specific requirements and submit documents for the lender to assess.
What are the cash-out refinance requirements?
The first thing to remember is that refinance requirements vary from lender to lender.
Even so, every lender makes its final decision based on your credit history, credit score, home equity, property value, and financial circumstances.
Some general refinance requirements include:
- More than 20% equity in your home
- Loan-to-value ratio of 80% or less
- A minimum credit score of 620
- Employment and income verification
- Debt-to-income ratio of 43% or less
- An appraisal of your home
Familiarity with these requirements will allow you to determine if you’re eligible for a cash-out refinance.
But of course, if you have questions, it’s always best to consult directly with a qualified lender.
How much of your home’s equity can you access?
The amount of equity you can access depends on two factors:
- Your home’s value
- Your current mortgage balance
With these two data points, your lender can calculate your home’s equity and determine how much cash you can access.
Most lenders will allow you to draw up to 80% of the value of your home.
What can I do with my cashed-out equity?
Generally speaking, you can do whatever you want with the funds. Some of your options include the following.
1. Home improvement project
Home improvement projects are the most common use of funds from a cash-out refinance. This can include:
- Kitchen remodel
- Bathroom remodel
- An addition to your home
- Adding a porch or patio
- Converting a basement or attic into a livable space
If you have a home improvement project on your to-do list, consider if refinancing is the best way to fund it.
2. Debt consolidation
The more types of debt you have, the more difficult it is to manage it.
Take for example a person with two credit card balances, a car loan, a personal loan, and a home equity line of credit.
Rather than continue to pay on each one, you can use a cash-out refinance to consolidate the debt. This leaves you with one balance and one payment. It can save you money on interest and reduce the anxiety of managing multiple balances.
3. Travel
If you dream of traveling the world, a cash-out refinance may be just what you need to book your flight and take on the adventure of a lifetime. From airline tickets to accommodations to a new vehicle for hitting the road, there’s no shortage of ways to use the funds.
4. Make a large purchase
This can range from a wedding for your child to the down payment on a vacation home. When you need access to a lump sum of cash, refinancing your home is an option to strongly consider.
Is a cash-out refinance right for you?
Even with the guidance above, you probably have questions about a cash-out refinance and how it pertains to your particular situation.
Ask yourself the following questions:
- Do you have a defined plan for how you will use the money? Do you have concerns that you may be irresponsible with the funds?
- Have you compared a cash-out refinance to other options, such as a home equity loan or home equity line of credit?
- Are you comfortable with the interest rate that you qualify for?
- Do you know how much money you want to borrow?
- Have you considered the impact of a refinance on your monthly budget?
The answers to these questions are likely to prompt others.
For instance, once you know how much money you’re borrowing, you must determine how it’ll change your mortgage payment and if you can afford it.
An experienced mortgage professional can help you answer these questions and give you guidance for your situation.
Are you ready to cash out?
It’s a big step in the life of your mortgage, but a refinance could put you on the right path to reach many of your goals.
If you’re ready to proceed, AAA Banking is here to guide you through the process from beginning to end.
Our loan officers are available Monday through Friday from 8:00 am to 8:00 pm EST by calling (844) 897-2265. You can also take action online by sharing basic details that allow us to provide you with the best path forward.
Photo by Curtis Adams