What is a cash-out refinance? If you’re a homeowner with sufficient equity, it’s a path with many possibilities. A cash-out refinance lets you turn your home equity into cash, and as The Mortgage Reports points out, “there are no rules about how you can or can’t use the funds from a cash-out refinance.” With that kind of freedom, you’ll want to know how to get the most out of this form of financing.
What Is a Cash-Out Refinance?
When you refinance, you replace your existing home loan with a brand-new mortgage with new terms. As the name implies, a cash-out refinance adds a new dimension because it allows you to cash out some of your home equity, transforming it into cash that you can collect at closing. How does it work? According to NerdWallet, this form of refinancing not only pays off your prior mortgage but also pays you a portion of the difference between the mortgage balance and your home’s value. The cash-out amount is generally limited to no more than 80 to 90 percent of your equity. It’s also worth remembering that cash-out refinances typically come with slightly higher interest rates than standard refinances. That’s because of the higher loan amounts involved.
Using a Cash-Out Refinance
What is a cash-out refinance good for? What can you accomplish with this kind of loan? There are plenty of possibilities. You can use the funding to pay for home renovations or repairs. Are you planning to attend a university? A cash-out refinance could help cover expenses. Alternately, it could be used to pay off medical expenses, to raise funds to start a business, to have money to invest, or to consolidate and pay off other debts. The possibilities are endless because there are no limits or rules on how you can use the funds that you receive from a cash-out refinance. However, experts urge caution. After all, these funds are available to you because of your home, and the property serves as collateral for the loan.
The Pros of a Cash-Out Refinance
When you need financing, there are real advantages to opting for a cash-out refinance. Forbes offers a list of potential benefits:
- You can use the cash that you get from the loan however you want.
- Any improvements or repairs that you make to your home could increase its value.
- Eliminating high-interest debt or paying for college could improve your long-term financial situation.
- A cash-out refinance allows you to borrow a large sum at a low interest rate.
- A cash-out refinance is often the cheapest way to borrow money.
- Refinancing may help you lower your interest rate.
The Cons of a Cash-Out Refinance
A cash-out refinance can be a wonderful tool if it’s used wisely, but it can have some serious drawbacks as well. Experian points out some of the possible drawbacks associated with this loan:
- Your home is at risk. As with any mortgage or refinance, the home serves as collateral. When you take out a cash-out refinance loan, you’re increasing the amount that you owe on your home loan. If you default on your mortgage, you could lose your home.
- Closing costs add up. They’re typically between two and five percent of your loan amount, so they total thousands of dollars. There may also be additional fees.
- Your original loan may have a prepayment penalty.
- If you borrow more than 80 percent of your home’s value, you may be required to pay private mortgage insurance.
- If you use the cash that you received from refinancing to enable bad habits, you may find yourself in deeper financial trouble. Paying off high-interest credit card debts isn’t helpful if you quickly run up new balances.
Are you ready to learn more about how a cash-out refinance loan works? Do you think this product could be the right solution for you? Reach out to PrimeLending Denver today. Our team of loan experts would be happy to talk with you and make sure that you understand the ins and outs of cash-out refinances. If you have questions, we have answers, and we’ll be on hand to guide you through the entire process. Contact us today to get started.