When it comes to refinancing, you typically have two options:
1. A Rate-and-Term (most common of the two): Refinancing your home to lower your mortgage rate or reduce or extend the amount of time you have to pay off the loan.
2. A Cash-Out (less discussed and understood): Refinancing that gives you more than just a decreased monthly home payment — it allows you flexibility in achieving otherwise lofty goals such as covering major expenses, investing, or paying off high-interest debts.
Additionally, mortgages currently have some of the lowest interest rates of any loan type offered due to the collateral involved: your house. Since the lender is taking on a relatively small risk, they can keep interest rates down, making Cash-Out Refinances one of the cheapest ways to achieve your financial goals.
Cash-Out Refinances piquing your interest yet? Let's break this down a little further:
A Cash-Out Refinance replaces your existing mortgage with a bigger one. This allows you to capitalize on the equity you've accumulated in your home and access the difference between the two loans (your current one and the new one) as a lump sum of cash. The money received from a Cash-Out Refinance can be used for almost any purpose like, but not limited to:
- Education expenses
- Medical expenses
- Investment purposes (retirement savings or purchase an investment property)
- Home improvements
- Business start-ups
- Debt consolidation
- Student loans
- Car loans
- Really, pretty much anything!
Cash-Out Refinances will not reduce the amount of debt you owe on your house. Still, it can be a valuable tool in providing the funds you need to lower your overall monthly costs by paying off other debts and avoiding higher interest rates.
Wondering how much you can "cash out" on? Read below:
Homeowners can typically borrow up to 80 percent of their home's value. But, this percentage can vary for several reasons: credit score, type of mortgage, type of property attached to the loan, etc.
Other Exceptions Include:
FHA Cash-out Refinance Mortgage Loans — can allow you to borrow as much as 85 percent of the value of your home
VA Cash-Out Refinance Mortgage Loans — can allow you to borrow up to 100 percent.
Still fuzzy on what a Cash-Out Refinance Entails? Let's look at an example:
Say your home is worth $300,000, and you owe $200,000 on your mortgage; you have $100,000 in equity. However, you won't simply receive a check for that $100,000. Instead, this calculation is based on a percentage of your home's value. For this scenario, we will calculate based on 80% of the home's value, which is $240,000.
You will use the new max loan amount for the refinanced mortgage ($240,000) to pay off your remaining loan balance ($200,000), leaving you with $40,000 to take out from your Cash-Out Refi.
Considerations before Cash-Out Refinance:
Your loan agreement will likely change. Because you are replacing your existing mortgage with a new one, the terms of the loan length, as well as interest rate, can vary.
Your home will need to be appraised. Most lenders require an appraisal, given that the amount you are eligible to borrow depends on the amount of equity you have.
You're going to pay closing costs. Like your original mortgage, these cover lender fees, the appraisal, and other expenses and will come out of your payout.
You're not going to receive the cash right away. You're usually allotted three days after closing to back out, and for this reason, you have to wait a few days post-close before you can access the funds.
As long as you educate yourself on the details of the refinance process and team up with the right mortgage company, like First Integrity Mortgage Services in St. Louis, Missouri, a Cash-Out Refinance can be the perfect solution to covering high-interest rates for pretty much any scenario. Reach out to one of our many highly experienced and knowledgeable loan officers so you can begin crunching the numbers and assessing if a Cash-Out refinance is suitable for you and your financial situation.
Already confident that a Cash-Out Refinance Loan is for you? Apply for a Mortgage Loan Online right now!
First Integrity Mortgage Services is licensed in Missouri, Illinois, Kansas, Arkansas, Tennessee, and California.