Owning a home comes with a number of pros and cons. One of the major advantages is that, as time passes, your home will eventually appreciate in value. Also, as you also pay off more and more of your mortgage, your home equity also begins to increase as well. For many, this can be a valuable source of capital, allowing you the ability to achieve your financial goals. And accessing this money is typically done through cash out refinance loans. Wondering if this is a smart financial move for you? If you are considering this option, here are a few things you should know first before applying.
How Do You Get Extra Cash From Your Home?
So, how exactly is it that your home gets you that extra cash? As mentioned earlier, property tends to naturally increase in value. And any home improvements can also add value as well. Additionally, each monthly payment you make on your mortgage lessens the amount you owe. These all contribute to a rise in your home’s equity, which is the difference between your home’s value and what you currently owe. So, if your home is worth $250,000 and you owe $200,000 on your mortgage, that means your home equity is $50,000. A cash out refinance loan gives you the ability to access these funds.
Cash Out Refinance Loans: The Basics
If you’re considering taking advantage of these funds, it’s important to know how this type of refinancing works. Cash-out refinance loans allow you to take new financing that includes your current mortgage amount plus up to 80% of your desired equity. And if your home is more than $500,000, you may even be able to borrow more. When you finalize the loan, you receive the equity amount in cash up front. In the example earlier, if you have $50,000 in equity, you can access up to $40,000.
Best Uses For These Funds
Typically, most people use their home’s equity for further home renovation projects, debt consolidation, or for a large purchase. Any improvements to your house can help to further increase its value, so using your equity for this purpose could be a good move. Paying off debt could also be beneficial, especially since it can boost your credit score. However, just be sure that if you are paying off credit cards, you’re not getting yourself into more trouble by using those newly freed up card balances.
The Fine Print
As with any loan, there are certain aspects of cash out refinance loans you should be aware of. First, remember that a mortgage will almost always comes with closing costs. For the refinanced home loan example above, that could mean you would have to pay up to 6% of the total amount up front, a whopping $14,000! So, keep in mind that while you are getting $40,000 in equity, you’ll only be ending up with $26,000 after everything is said and done. Fortunately, there are some financing options that allow you to refinance without involving closing costs. Be sure to ask your lender for more details on this alternative.
Additionally, you may not get the same interest rate as you had on your previous mortgage. This may be a good or bad thing, depending on when you originally purchased your home and your current credit score. And if you do end up using more than 80% of your home’s equity, you’ll be required to also pay private mortgage insurance. Finally, don’t forget about taxes! You will still be obligated to pay taxes on any interest earned from your newly refinanced mortgage.
Do I Qualify?
There are normally several qualifications for cash out refinance loans. First, in most cases, you must have a loan to value ration of 80% or lower. This means that your mortgage amount is no more than 80% of its total purchase value. In the example from earlier, your mortgage is $200,000 and your home’s value is $250,000, which is a loan to value ratio of exactly 80%. And, of course, you will need to have a decent credit score in order to qualify as well. Finally, most lenders require you to have been residing in your home (and making reliable payments towards your mortgage) for a least one year before applying for refinancing. If your home is an inherited property, then you will have to wait two years before you can look into this option.
If you’re considering a cash out refinance loan, let our mortgage experts help you decide if this is the best financial move for you. Visit us online today for the best rates, quickest quotes, and fastest closing times on the market!