Cash-Out Refinance

Making the decision to refinance your house is a big one, but it’s often the right one. Especially when you have the option of accessing much lower interest rates, better loan terms, and the equity in your home. But, refinancing comes with a load of paperwork and, hopefully, a load of research before you feel comfortable making the leap. At Lending Studios, we want to make researching your refinancing options as easy as possible. That’s why we make access to tools and resources simple. The refinancing process may be complex, but finding out whether it’s the right option for you should be fairly simple.

As you likely already know, there’s a wide selection of loan options available. You can access a 15-year refinance or renew your 30-year with a new loan at better interest rates. You can access quick perks through streamline refinance options, or you can keep your equity in your home and start aggressively paying down the principal. However, depending on your specific circumstances, you may also be able to access a cash-out refinance.

What is a Cash-Out Refinance?

Just like every other type of refinancing, a cash-out refinance replaces your current mortgage with a new loan. However, it does this by creating a new mortgage that’s higher than your current outstanding loan balance. This allows you to be able to withdraw the difference between the two mortgages in cash and put that money toward whatever you’d like. This money can be used for home remodeling and increasing the value of your home, consolidating high interest debt like your student loans, or accomplishing other goals for your financial future.

Essentially, this allows you to pull out a portion of your home equity in a large sum. However, lenders usually only allow you to withdraw no more than 80% of the total value of your home. This is to ensure that you still have an equity cushion that keeps you financially protected in the future.

How to Gain Equity to Withdraw

A cash-out refinance requires that you have equity in your house, at least to a degree. So, the next natural question is “How do I get equity?” However, it’s not a simple answer. In general, you can gain equity in your home in two ways: the home increases in value and you pay down your mortgage principal. To gain equity through mortgage payments, you’ll have to be a fair way through your initial mortgage on the home to have much equity invested. For your home to increase in value, you can alter this through home improvements or by getting lucky in the area you buy in.

Because one of the main ways of adding equity and value to your home means large renovations, many folks turn to cash-out refinancing to pursue those opportunities. When your loan is approved and your refinance is put down in print, you can do anything you want with the cash you get from the new loan. This money is taken from the equity in your home, so for lots of people, it makes sense to put it back into the home in one way or another. However, if you’re struggling with a new ailment that requires lots of income to go straight to hospital bills or you’re trying to find money to help your child pay for college, this can be a good way to access those funds as well. It’s also a great way to pay off credit card debt. If you’re stuck under seemingly insurmountable credit debt, it could be an easy solution to trade that high interest debt for a lower interest debt by drawing out the cash to pay it off with a cash-out home refinance.

Indeed, there are many reasons why and many benefits to cash-out refinance options. After all, there’s a reason so many people refinance their homes to access the cash, the lower interest rates and other benefits from refinancing.

The Ups & Downs of Cash-Out Refinancing

Benefits of Cash-Out Refinance

• Get money to invest
• Lower your loan interest rate
• Consolidate your debt
• Finance home renovations

Potential Downsides to Cash-Out Refinance

• You’re taking your home equity
• The cash isn’t immediate
• You’ll have to pay closing costs
• Loan terms might change
• You’ll need an appraisal

The Potential Benefits

• Access Investment Money: Investing money during a booming market is always a smart financial decision. However, if you don't have access to cash, you'll need to find it somewhere. Plenty of people seek a cash-out refinance in order to access the funds they need to start investing. Certainly, the power of compounding interest in a good investment is a very attractive idea, and using the home equity you take from your house to improve your retirement fund and save up some money can be a good use of the funds. One of the easiest ways to access that boost in capital you need to make that easy is a cash-out refinance.
• Lower Interest Rates: Lower interest rates on loans are always a great idea. If you can pay less to borrow the money you need to make things work, you should take the opportunity. Indeed, that’s the precise advantage that most folks seek out when they refinance their home. Experts often advise that even 1% point less is often enough to save you a considerable amount of money and totally worth refinancing. This strategy is often followed with the cash-out refinance for the purpose of paying down other higher interest loans. For example, if you can refinance your house for 3% interest and take cash out to pay down your student loans that have close to 6% interest. When that loan is paid off, you'll have avoided paying 3% of the interest on your student loans. Trading that for a lower interest rate on your house is, obviously, worth it as you’ll end up saving thousands of dollars in interest payments alone.
• Consolidate Your Debt: Even if you remove the interest rate benefit from the scenario, you’re still accessing a much better way to manage your debt. If you take a cash-out refinance and use that cash to pay down all your loans, from credit card to car debt, you’re still borrowing that money. However, you’ll be limiting the payment for that debt down to one bill per month. In regards to stress and organizing your financial resources and your budget, life will become much more simple. This is an easy benefit to access through a cash-out refinance loan.
• Renovate Your Home: Upgrading your home is one of the only sure-fire ways to get more equity into your house. You’ll increase the value of your home and also increase your enjoyment of the house while you live there. Upgrades like irrigation systems for your grass, expanding the outdoor area, investing in an HVAC upgrade, or even just upgrading your kitchen are great ways to improve your home. Plus, every improvement you make goes right into the value of your home and increases the equity in your home. It is, by all accounts, one of the wisest things you can do with cash you pull from the equity in your home as it’s as good as reinvesting it right then and there.

The Potential Downsides

• Pulling Cash From Home Equity: However, it’s important to note that this isn’t always the right way to refinance. Many are wary of removing their home equity from their house as it’s likely one of the biggest assets you have and the money you’ve already invested in it was meant to pay off the house until you own your home free and clear of debt. It’s also important to note that a cash-out refinance still requires you to have some equity left in the home. On average, most cash-out refinances require that there’s at least 15-20% of equity left in the loan. If you don’t have that kind of equity in your home, you won’t be able to draw from the cash in the equity of your home.
• Lag In Cash Payout: Most folks think that as soon as they refinance the house they’ll have the money for their home equity transferred right into their bank account. Unfortunately, that’s just not how it works. Because of a variety of laws and the time it takes to complete a refinance on a home, receiving your cash is not exactly immediate. First off, your lender is required to give you three days to change your mind about the loan and back away. Even after that, you won’t get your cash immediately. It’ll take around 3-5 days for the funds to transfer into your account. So, if you need the money tomorrow, a cash-out refinance probably isn’t the right option for you.
• Closing Costs: Loans require closing costs, and unless you’re looking into a VA loan, you won’t get to roll those closing costs into the bulk of the loan. You’ll need to pay it, out of pocket as you go through the loan process. Closing costs include credit report fees, attorney fees, appraisal fees, and other fees depending on what your state requires of you. Before you refinance, be sure to closely evaluate how much money you’re saving or gaining in the refinance process to ensure the costs don’t outweigh what you stand to benefit.
• Loan Terms: The other thing that you should consider before pursuing a refinance is that your loan terms may change from what your current mortgage agreement details. You’re getting a brand new loan for the house, and it’s very likely to be different than the original agreement. Your new loan may take a longer or shorter time to be paid off, your monthly payments could be different and your interest rate will change too. Analyze the new loan terms you’re looking for carefully and be sure you’re familiar with what your budget can handle before you embark on the cash-out refinance process.
• Appraisals: Cash-out refinances are entirely contingent on the appraisal you get for the home. You’ll need to have this completed by a third party before you begin. This can take time and money, and you may not get the appraisal for which you were initially hoping. Be sure to factor this into your considerations before approaching refinancing.