Cash Out Refinance – How It Can Help You

If you are looking to refinance your home, then it is important to understand the types of refinancing options that are available. Different types of loans can have an impact on whether or not it will be beneficial for you to go through the work of refinancing your mortgage. There are certain situations where a cash out refinance might make sense, but it is a good idea for you to understand how the loan works before you decide whether it is right for your needs.

Cash Out Refinance

What is a Cash Out Refinance?

When a person owns a property, they have the option to refinance the loan for various reasons. A cash out refinance is a little different than other types of financing, because it is a situation where the property owner takes a loan on property that they already own. This loan is higher than all of the cost factors that need to be considered: the related expenses, payoff of any existing liens, and the cost of the transaction. So, there is cash leftover for the property owner to use for something else. The term “cash out” is usually used in reference to a situation where the refinance occurs to liquidate equity and provide excess cash to the property owner.

Cash Out Refinancing Example

To help you understand this concept, consider this situation: Bob is a homeowner who has a home that is appraised at $250,000. He has $150,000 in equity and still owes $100,000 on the home loan. When he decides to refinance the mortgage, he could choose to obtain a loan that is higher than the $100,000 that remains on the loan.

Bob decides to use a cash out refinancing option, and the new loan is for $120,000. The bank pays out an extra $20,000, which he then uses to upgrade his kitchen and finish the basement.

Factors that Impact Eligibility for a Cash Out Refinance

There are only certain situations when a cash out refinance makes sense, and the bank will take a close look at your individual situation in order to determine if you qualify for the loan. Some factors that are considered include:

-The overall value of the home or property
-Eligibility requirements for the cash out refinance program
-Preferences of the mortgage lender
-Equity of the home
-Credit history of the borrower

How to Decide if a Cash Out Refinance is Good for You

If you are trying to decide whether you should refinance with cash out, it is a good idea to take a close look at your financial situation and talk with an expert to determine the best option for your needs. Certain factors need to be considered, such as whether or not you qualify for a VA home loan, as well as the type of loan that was issued when you bought the property.

You can find a cash out refinance calculator online, which will allow you to look at the numbers and how they will impact your monthly payments. A cash out refinance calculator is a great way to get a general idea about how the refinance would look, but the best way to obtain exact details is by talking with a loan officer.

 

Fill out this Online Application to see if you qualify for a VA Cash Out Refinance.

 

Why a Cash Out Refinance Could Be Beneficial for You

Because your home is an investment, you can use it to access credit and cash. Through the refinancing process, you get more money than you currently owe, which means that you can take the surplus difference. That extra money can be used for various reasons, and sometimes it is cheaper than taking out a different type of loan.

Additionally, it is possible for the refinance to result in a decreased interest rate. If you are considering a cash out refinance and find out that your interest rate will actually go up, then it might make sense to explore other financing options instead. You should look at the length of time that you have been paying on the mortgage, how much interest vs. principal is being paid with each payment, and the total out-of-pocket expenses that will be incurred with either option. Each situation is unique, which is why you need to explore the pros and cons of cash out refinancing to make your decision.

Short Term and Long Term Financial Goals

One factor to consider with a cash out refinance is the way the money will be used. If you will be using the money to upgrade the home, then it could potentially result in a higher appraisal when you decide to sell the property. On the other hand, sometimes people find themselves in a situation where they need the money for medical expenses, college tuition, or another major life cost. In these situations, it might make sense to explore other loan options before deciding on a cash out refinance.

It may seem tempting to do a cash out refinance so that you can go on your dream vacation or buy a new car, but is it worth paying the higher mortgage payment for 15 or 20 more years? Sometimes people view the cash out option as free money, but the truth is that it will have an impact on your mortgage and it will cost more money in the long run.

Before you run out to refinance so that you can buy a boat, car, or pay for your daughter’s wedding, consider the financial impact that the loan will have in the future. These types of loans are often better used for something that will last for many years to come, such as an upgrade to your home (which will increase the property value), start up cash for your new business, or a necessary medical treatment that is not covered by insurance.

You might consider a refinance with cash out so that you can pay off a load of credit card debt, but you should run the numbers before making that decision. Even though it is nice to see the credit card paid off right away, a refinance will result in the situation where you will actually be paying on that debt for many years to come.

Home Equity Loan vs. Cash Out Refinance

Some people assume that a home equity loan is the same thing as a cash out refinance, but the truth is that there are distinct differences between these financing options. With a home equity loan, you already have a mortgage in place for the property, and a second loan is put in place. With a home equity loan, you are technically paying on two mortgages for your home.

On the other hand, a cash out refinance replaces the original mortgage, so that you only have one mortgage on the property. The newer loan pays off the first loan, and there is a little bit of excess cash after the transaction is complete.

Most of the time, it is beneficial to choose a cash out refinance, because it usually results in a lower interest rate (compared with a home equity loan). The drawback is that you will have to pay the closing costs to refinance your home loan, but sometimes the reduced interest rate is plenty to cover the closing costs. With a home equity loan, you usually aren’t required to pay any closing costs.

Talking With a Professional

The best option is to talk with a financial advisor to help you put together the best plan for your future. Talking with an advisor is a good way to get a non-biased opinion about the potential refinance. Remember that lenders will sometimes give you biased information about whether or not you should refinance, because they will be earning a commission if you choose to refinance.

When you decide to talk with the lender to learn more about the cash out loans that are available, here are a few questions that you should ask:

-What is the interest rate of the new loan?
-How much will I pay in closing costs?
-What will my monthly mortgage payment be?
-Do I qualify for this type of loan?
-What type of documentation will be required for the loan?
-Is there a penalty for prepayment?
-Will the interest rate be locked in, or will it be a variable interest rate?
-How long will it take before the refinance is complete?
-How long will I be paying on the loan to pay it in full?

Doing some research ahead of time can save you quite a bit of money, and you will have the peace of mind to know that you are making a wise decision with your finances.

 

Fill out this Online Application to see if you qualify for a VA Cash Out Refinance.

 

One comment on “Cash Out Refinance – How It Can Help You”

  1. It’s difficult to find educated people for this topic, however,
    you sound like you know what you’re talking about! Thanks

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