What You Need to Know About Cash-Out Refinancing

What You Need to Know About Cash-Out Refinancing

Refinancing your home could put cash in your hands.

Homeowners: Close your eyes and picture your house. Got it? OK, now imagine it again, this time as a giant piggy bank with a roof, a chimney, a front door—the works. What if we told you that this isn’t just your imagination, it’s a metaphorical possibility: You could transform your home equity into cash with a cash-out refinance. Are you curious? Read on.

WHAT IS A CASH-OUT REFINANCE?

Refinancing is the process of replacing your original home loan with a new one, that may include a new interest rate and loan term. Refinancing can help you consolidate your debt, gain financial stability, oftentimes lower your interest rate, potentially pay off your mortgage sooner, and even get cash out. If those are benefits that catch your attention, stick with us here because it’s about to get interesting.

A cash-out refinance happens when the borrower refinances for more than the amount owed and pockets the difference. This allows you to tap into your home’s equity and turn it into hard cash. Now we’re talking.

WHAT IS EQUITY?

If equity is one of those financial terms that you’ve heard before but don’t quite understand, allow us to define it for you: Home equity is the value of a house or property that represents the current market value of the house against its remaining mortgage payments (not including interest). This equity would increase over time if the market value of the property appreciates and as mortgage payments continue to be made.

Let’s break it down even more. Seven years ago, you bought your house for $100,000 and now it’s worth $200,000. You could refinance the house and take cash out for it now that it’s worth more than it was seven years ago.

Even though we’re talking about home equity, don’t confuse a cash-out refinance with a home equity loan or a home equity line of credit (HELOC). These seemingly overlapping terms are actually quite different. A home equity loan or line of credit is its own lien on the property (this would be in addition to your current mortgage, if you have one already. Neither of these replaces or changes the terms of your current home mortgage). Conversely, a cash-out refinance is a loan that would replace the terms on your current mortgage. All of these options give you a chance to consider taking advantage of potentially better loan terms with the additional equity that has been accumulated.

WHAT ARE THE BENEFITS?

In the midst of this giving season, debt consolidation sounds pretty attractive—and it’s a major benefit to cash-out refinancing that entices many homeowners. Take advantage of other benefits to this kind of refinance and make practical improvements to your home, like installing a new furnace, replacing a broken dishwasher, or fixing damaged parts of your roof.

If you’re looking to make your home a little more visually appealing, use your cash-out refi to remodel your master bathroom or get those butcher block countertops that are so popular right now. If you wait until the spring to do a cash-out refi, you could pay to have those unsightly shrubs removed from your front lawn or start building that dreamy pergola you’ve always wanted.

You can use the cash from your cash-out refinance any way you want, but many refinancers use this money for home improvement projects like landscaping or remodeling.

WHAT’S THE CATCH?

While cash-out refinancing may sound like music to your ears, we can’t call it a perfect solution. Be advised that lenders usually limit the amount of equity that you can take out of your home. Give us a call to find out if you should take advantage of a cash-out refinance.