Step 4: Understanding cash-out refinancing
Cash out refinancing is a type of refinancing where you exchange your current home loan for a new one but any home equity you have is swapped out for cash.
Your new loan would be the sum of your old mortgage plus the amount of equity you cashed out.
Most homes appreciate over time, so many homeowners have more equity in their home than they are aware.
A good gauge of your home’s value is to look at your tax assessment to get a ballpark, but your bank will do an appraisal to assess your home’s current value once you begin the refinance process.
How to Do a Cash-Out Refinance
In order to do a cash-out refinance you need to have some equity built up in your home. Whatever equity you have in your home is what you’re borrowing money against.
Say your initial mortgage was for $200,000, but your home is now worth $300,000. The remaining $100,000 is the amount you could cash-out. If you did cash-out all of it, your new mortgage would be for $300,000, but you’d have $100,000 in the bank to use as you see fit.
Applying for a refinance is very much the same as applying for a mortgage, so you’ll need to have copies of paystubs, tax returns, as well as copies of any asset statements you have.
When It’s a Good Idea
There are certain scenarios where a cash-out refinance is definitely a good idea, but each of them revolve around putting you in a stronger financial position. See below:
Pay Off High Interest Debt
If you have a lot of high interest debt, such as credit cards, auto loans, or student loans that are eating up your monthly cash, then, depending on certain factors, cashing out the equity you’ve developed in your home to pay them off would make sense— as long as your monthly DTI lowers, of course!
Continue Your Education
Any kind of professional development that could increase your salary would be a wise use for the cash from a cash-out refinance— especially if the potential new income would far outweigh the increase in monthly mortgage payments.
Upgrade or Repair Your Home
If you need a larger home but don’t want to go through the whole home buying experience again, a cash-out refinance could get you the ideal home without requiring you to uproot your family and take on more debt.
Or, if you need to sell your home but know you need to make some improvements, such as replacing the roof or upgrading the home’s plumbing, then a cash-out refinance could quickly get you the cash you need to make your home more sellable.
Get a Better Rate
If rates have significantly lowered since you initially bought your home or your credit score has improved, it’s quite possible you could lower your monthly mortgage and boost your savings at the same time with a cash-out refinance.