How to Use Cash-Out Refinance to Boost Your Finances

How to Use Cash-Out Refinance to Boost Your Finances – Are you a homeowner with equity in your property? If yes then you may be able to use cash-out refinance to access some extra cash and improve your financial situation. Cash-out refinance is a type of mortgage refinancing that lets you replace your existing loan with a new one that is larger than the amount you owe. The difference between the two loans is paid to you in cash, which you can use for various purposes, such as home improvement, debt consolidation, education, or emergency fund.

But how does cash-out refinance work, and what are the benefits and drawbacks of this option? In this article, we will explain everything you need to know about cash-out refinance, including how much cash you can get, how it affects your mortgage terms, and what factors you should consider before applying for one.

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What Is Cash-Out Refinance?

Cash-out refinance is a mortgage refinancing option that allows you to convert some of the equity you have built up in your home into cash. Equity is the difference between the current market value of your home and the amount you owe on your mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity.

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With cash-out refinance, you can take out a new mortgage for more than your current balance, and use the extra amount to pay off your existing loan and receive the remaining amount in cash. For instance, if you want to get $50,000 in cash from your equity, you can apply for a new mortgage of $250,000 ($200,000 to pay off your old loan and $50,000 in cash). The new loan will have different terms than your original loan, such as interest rate, loan term, monthly payment, and closing costs.

How Much Cash Can You Get with Cash-Out Refinance?

The amount of cash you can get with cash-out refinance depends on several factors, such as:

The value of your home
The amount of equity you have
The loan-to-value (LTV) ratio of your new loan
Your credit score and income
The type of mortgage and lender you choose

Generally speaking, most lenders allow you to borrow up to 80% of the value of your home with cash-out refinance. This means that if your home is worth $300,000, you can get a new loan of up to $240,000 ($300,000 x 80%). However, this does not mean that you can get $240,000 in cash. You also have to subtract the amount you owe on your current mortgage and any closing costs from the new loan amount. For example, if you owe $200,000 on your existing loan and have to pay $5,000 in closing costs, you can only get $35,000 in cash ($240,000 – $200,000 – $5,000).

Some lenders may offer higher LTV ratios for certain types of mortgages or borrowers. For example:

FHA loans allow you to borrow up to 85% of the value of your home with cash-out refinance.
VA loans allow you to borrow up to 100% of the value of your home with cash-out refinance.
Conventional loans may allow you to borrow up to 90% of the value of your home with cash-out refinance if you have a high credit score and low debt-to-income ratio.

To find out how much cash you can get with cash-out refinance, you can use an online calculator or talk to a lender who can give you a personalized quote based on your situation.

How Does Cash-Out Refinance Affect Your Mortgage Terms?

Cash-out refinance affects your mortgage terms in several ways. Here are some of the main changes that may occur:

Interest rate

The interest rate of your new loan may be higher or lower than your current rate depending on the market conditions and your credit profile. If interest rates are lower than when you took out your original loan, you may be able to save money on interest over time. However, if interest rates are higher or if you extend your loan term with cash-out refinance, you may end up paying more interest over time.

Loan term

The loan term is the length of time it takes to pay off your mortgage. With cash-out refinance, you can choose a shorter or longer term than your original loan. A shorter term may help you pay off your mortgage faster and save money on interest but increase your monthly payment. A longer term may lower your monthly payment but increase the total interest cost and extend the time it takes to build equity.

Monthly payment

The monthly payment is the amount you pay each month toward your principal and interest. With cash-out refinance, your monthly payment may increase or decrease depending on the interest rate, loan term, and loan amount of your new loan. If you borrow more money with cash-out refinance, your monthly payment will likely increase. If you lower your interest rate or extend your loan term, your monthly payment may decrease.

Closing costs

Closing costs are the fees and charges you pay to finalize your mortgage. With cash-out refinance, you have to pay closing costs again, just like when you took out your original loan. Closing costs typically range from 2% to 6% of the loan amount. You can either pay them upfront or roll them into your new loan, which will increase your loan balance and interest cost.

What Are the Benefits of Cash-Out Refinance?

Cash-out refinance can offer several benefits, such as:

Access to cash

Cash-out refinance can provide you with a large amount of cash that you can use for various purposes, such as home improvement, debt consolidation, education, or emergency fund. Using the cash for home improvement can increase the value of your home and boost your equity. Using the cash for debt consolidation can help you pay off high-interest debt and improve your credit score. Using the cash for education can help you invest in your future and increase your earning potential. Using the cash for emergency fund can help you prepare for unexpected expenses and avoid financial stress.

Lower interest rate

Cash-out refinance can help you lower your interest rate if the market rates are lower than when you took out your original loan. A lower interest rate can reduce your monthly payment and save you money on interest over time.

Tax deduction

Cash-out refinance may allow you to deduct the interest you pay on your new loan from your taxable income if you use the cash for home improvement or to buy or build a second home. However, the deduction is subject to certain limits and rules, so you should consult a tax professional before claiming it.

What Are the Drawbacks of Cash-Out Refinance?

Cash-out refinance also has some drawbacks, such as:

Reduced equity: Cash-out refinance reduces the amount of equity you have in your home, which means that you own less of your home and owe more on your mortgage. This can make it harder to sell or refinance your home in the future, especially if the home value drops or if you have a negative equity situation (when you owe more than your home is worth). Reduced equity also means that you have less cushion to protect yourself from foreclosure if you fall behind on your mortgage payments.
Higher interest cost: Cash-out refinance may increase your interest cost over time if the interest rate of your new loan is higher than your current rate or if you extend your loan term with cash-out refinance. A higher interest cost can reduce the amount of money you save or earn from using the cash for other purposes.
Higher monthly payment: Cash-out refinance may increase your monthly payment if you borrow more money with cash-out refinance or if you choose a shorter loan term with cash-out refinance. A higher monthly payment can make it harder to afford other expenses or save money for other goals.
Closing costs: Cash-out refinance requires you to pay closing costs again, which can add up to thousands of dollars. You can either pay them upfront or roll them into your new loan, which will increase your loan balance and interest cost.

How to Decide If Cash-Out Refinance Is Right for You?

Cash-out refinance is not a one-size-fits-all solution. It may be right for some homeowners but not for others. To decide if cash-out refinance is right for you, you should consider:

Your financial goals: What do you want to achieve with cash-out refinance? Do you have a specific purpose for using the cash, such as home improvement, debt consolidation, education, or emergency fund? How will using the cash help you improve your financial situation in the short and long term? Are there other ways to achieve your goals without tapping into your home equity?
Your current mortgage terms: What are the interest rate, loan term, monthly payment, and remaining balance of your current mortgage? How much equity do you have in your home? How long do you plan to stay in your home? Are you satisfied with your current mortgage terms or do you want to change them?
Your new mortgage terms: What are the interest rate, loan term, monthly payment, and closing costs of your new mortgage? How much cash can you get with cash-out refinance? How will refinancing affect your equity, interest cost, and tax situation? Are you comfortable with taking on more debt and paying more interest over time?
Your personal situation: What is your credit score and income? How stable is your income and employment? How much savings and debt do you have? How well do you manage your budget and cash flow? Do you have an emergency fund and insurance coverage? How confident are you about repaying your new mortgage?

To make an informed decision, you should compare the pros and cons of cash-out refinance with the alternatives, such as home equity loan, home equity line of credit, personal loan, or credit card. You should also shop around and compare different lenders and mortgage products to find the best deal for your situation. A cash-out refinance calculator can help you estimate how much cash you can get and how refinancing will affect your monthly payment and interest cost.

Cash-out refinance can be a useful tool to access some extra cash and improve your finances, but it also comes with some risks and costs. Before you apply for one, you should weigh the pros and cons carefully and make sure that you can afford the new mortgage and use the cash wisely.

Frequently Asked Questions (F&Qs)’

What are the terms of a cash-out refinance?

The terms of a cash-out refinance can vary depending on the lender and your individual financial situation. Some factors that may affect the terms of a cash-out refinance include your credit score, the loan-to-value (LTV) ratio of your property, and current market interest rates. You usually pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, in which a mortgage amount stays the same. Closing costs for a cash-out refinance can range between 2-6% of the total loan amount and are deducted from your “cash-out” at closing.

How long is a cash-out refinance?

The duration of a cash-out is typically takes between 45 to 60 days to close on a cash-out refinance loan. However, you won’t receive the funds immediately after closing. Most lenders wait three business days following closing in case you want to rescind the contract. The timeline for a cash-out refinance can range from one to two months depending on various steps, including the application process, waiting to lock the rate, completing the appraisal, underwriting, document signing, and a three-day mandatory waiting period during which the borrower can change their mind.

How do you receive money from cash-out refinance?

When you close on a cash-out refinance loan, you receive the funds in a lump sum. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and any prepaid items (for example, real estate taxes or homeowners insurance); any remaining funds are paid to you. The cash you receive from a cash-out refinance is not considered taxable income by the IRS. Instead, it’s considered a loan, so you don’t need to report the proceeds as income on your taxes

What is the difference between cash out and cash-out refinance?

Cash-out and cash-out refinance are two different things. A cash-out refinance is a mortgage refinancing option that lets you convert home equity into cash. A new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash. On the other hand, a home equity loan is a separate loan from your mortgage and adds a second payment. Cash-out refinances are first loans, while home equity loans are second loans. Cash-out refinances pay off your existing mortgage and give you a new one.

How to Use Cash-Out Refinance to Boost Your Finances

\How to Use Cash-Out Refinance to Boost Your Finances

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