A cash out refinance replaces your existing mortgage with a new loan that’s higher than your existing loan balance. In most cases it may have better terms than your current loan.
The difference between these two mortgages will be given to you in cash. Which you can use towards remodeling your house, consolidating high-interest debt or other goals you may have.
The 4 Popular Cash out refinance Options
The three most popular cash-out refinance options are:
These types of cash out refinancing are available to home-owners who have equity that is 20% or more in their homes
If you have over 20% equity in your home, with this cash out you can refinance up to 80% of your home’s value
This option gives you the option to refinance of your home value if you are a veteran or currently serving in the military or your spouse is serving.
30 Year Fixed Rate Loan
This traditional cash out option with fixed payments is great for saving money
Example of how a cash-out refinance works
Let’s say your house is worth 300k and you owe 100k, and refinancing your mortgage is going to give you lower interest rates and you are planning to use the extra cash to pay off your student debt.
After a cash out refinance on this particular home because require you to maintain a 20% equity in you will be able to withdraw up to $140k in cash
The Advantages Of Cash Out Refinance
The pros of cash out refinance are so many, I have listed below some most common advantages of using a cash out refinance:
Get a lower interest rate on your mortgage
The most common advantage of using a cash out refinance, is getting a lower interest rate than your current loan on the other hand you will also get a bigger loan.
Increase The Value Of Your Home
If you use cash out refinance to improve your home you can be able to deduct your mortgage interest from your taxes if this home improvement increases the value of your home. It will also be less expensive to do a cash out refinance than using some methods of financing such as personal loans and credit cards.
Consolidate and pay off high-interest debt
This is a good financial move, cash out refinancing will benefit you if you reduce the interest rate on your primary mortgage and you use the funds that you take out for paying off debt or remodeling your house.
Why Cash Out Refinancing Can Be A Bad Idea?
Like all things cash out refinancing is not always the best answer to some of your financial problems, find below some reasons why it may not be the right thing to do for you.
Increases the interest rate of your existing mortgage
A point to take note of is that a cash out refinance has to always lower the interest rates of your primary loan, if it does not do this then you must not refinance.
Drags out the repayment of an existing debt for decades
You should know that when taking a cash out refinance the cash that you take out, the repayment will be spread over a period of 30 years which may mean you are not going to save as much as you are thinking you are going to
Risk Of Losing Your Home
If you fail to pay a cash out refinance it means your house may end up foreclosed. I advise you not to take out money more than what you need. When taking out cash make sure you are going to use it for purposes that improve your financial situation rather than worsen it.
Cash Out Refinance Rates
You are going to pay a range between 3% to 5% of the loan amount in closing costs for you to be able to do a cash out refinance. These closing costs are going to include lender fees and appraisal fees for the current home value.
If you want to get the best cash out refinance rates make it a point that you shop around with multiple lenders