Interest rates are inching back up. And even though they are nowhere near the double-digit highs of the 1980s, they are nearly 2X higher than they were just two years ago.
That means if you bought your home in the last decade or so and you hadn’t refinanced when rates were lower, you may have missed the boat for now.
Why did so many homeowners recently close out their original loan and refinance? The same principal balance financed with a better rate at new terms typically results in lower monthly mortgage payments* or a loan that’s paid off faster.
But, depending on your personal financial goals, there’s still a refinancing product that might be right for you. Keep reading to learn about the advantages of a Cash-Out Refinance.
A Cash-Out Refi is different.
A Cash-Out Refi allows qualified homeowners to use their home as collateral to borrow some money while simultaneously refinancing their mortgage.
Look at it this way; you’ve been investing a little in your home with each monthly mortgage payment. And that money is there if you wish to borrow against it for a significant planned or emergency expense. It’s sort of like refinancing your home loan, adding a Home Equity Loan or HELOC line of credit and getting cash-in-hand at closing.
Do you mean I can borrow money I’ve already invested?
Yes! How much you can borrow depends on how much equity you already have built up — meaning how much of the principal you’ve already paid down.
But there are other factors to consider, like how much your home is actually worth. With home values increasing, the amount available through a Cash-Out Refinance may be more than you think!
A Cash-Out Refi can provide you with any amount within your current home equity, which is the amount a home is worth minus what’s still owed on the mortgage. It’s a number you should know if home improvements or other large expenses are on the horizon.
Home equity is easy to calculate in 4 simple steps.
- Put your address into these forms on Zillow, Realtor.com and Redfin.
- Use an average of the property values shown to get a rough idea of what your home is worth.
- Check how much you still owe on your mortgage.
- Subtract step 3 from step 2. That’s your estimated home equity!
To qualify for a Cash-Out Refi, you must have at least some home equity. If you’ve had a mortgage for only a year or so, you may not have that much home equity built up yet — your first few years of mortgage payments generally go more towards paying off the interest than the principal. But if you have a few years of mortgage payments behind, a Cash-Out Refi might be a viable option.
Do the math before moving forward!
Tapping into home equity is great if you’re a homeowner facing expensive home upgrades or repairs or are looking to pay off some debt. But how do you know exactly how much money is available?
When refinancing, most banks let you borrow no more than 80% of a home’s value. What will that look like for you? Let’s try this example:
Imagine that you bought your home for $200,000. Because home values have increased so much, let’s imagine that it’s now worth $250,000. With a borrowing limit of up to 80%, you could feasibly close out your old mortgage and borrow a new total of $200,000.
Now let’s say that you still owe $140K towards your mortgage principal. Subtract that from what you can borrow ($200,000-$140,000) and you get $60,000 still available as cash in your pocket!
Keep in mind that you’ll still have closing costs to factor in, as you would with any mortgage refinancing. They can include lender origination fees and an appraisal fee to assess the home’s current value, and you might be able to roll them into the loan amount. Expect to pay about 3 to 5% of the total, depending on your loan size.
Reasons to apply for a Cash-Out Refi?
There are dozens of reasons homeowners might want to tap into their home’s equity. And with a Cash-Out Refi, you may be able to knock off several all at once. Some projects may even be tax-deductible!
Which of these are on your to-do list?
- Add a home office, guest bedroom or in-law apartment
- Build a deck, patio or in-ground pool
- Create the laundry room you’ve always wanted
- Enhance your curb appeal with better landscaping
- Enjoy life events like a wedding day, a vacation or a college education
- Get tankless water heaters
- Go solar and smart-tech
- Handle pricey medical bills
- Improve home security
- Install or repair a fence
- Update your bathrooms
- Remove dead or bothersome trees
- Repair your roof
- Replace a failing HVAC system
- Roll credit card bills and high-interest loans into a single payment
- Transform the basement into a man-cave or the garage into a she-shed
- Update the kitchen with new appliances
- Upgrade old drafty windows
Just remember, this is still a loan that must be repaid. Determine exactly how much you’ll be needing and resist borrowing anything additional.
Cash-Out Refi advantages and disadvantages
Because each payment you make against your mortgage adds a little to your equity, your home acts as an investment account. It might even be worth more now that home values across America have skyrocketed! Think of a Cash-Out Refinance as a different form of cash withdrawal.
- A Cash-Out Refi is a cost-effective way to borrow money as interest rates for refinancing tend to be lower than for regular mortgages.
- A Cash-Out Refinance can help free up your budget to alleviate any financial strain.
- If you use the money borrowed to pay off debt with higher interest rates, the borrowed amount is stretched over an extended period, making payments more manageable.
- The balance owed on your refinanced loan will equal the amount you owed on your old mortgage plus the amount borrowed, so you’ll owe more overall.
- You’ll need to commit to a new time frame to pay your mortgage off.
- When your mortgage closes, your payment history stops being reported, so your credit score may dip for a short time.
Speak to a Movement Mortgage loan officer in your area to discuss your financial goals, see if you qualify for a Cash-Out Refi and if closing costs make sense for your particular situation.
*By refinancing your existing loan, your total finance charges may be higher over the life of the loan.