The top reasons to refinance your home include getting a lower rate, a shorter term, and/or lower monthly payments. Cash-out refinancing can deliver these benefits with the additional bonus of receiving a single lump sum of cash to use anyway you like.
Your home’s equity is like any other financial asset you worked for. Why shouldn’t you be able to take advantage of it? Cash-out refinancing lets you turn your equity into cash. And unlike many other investments, there are no tax consequences for accessing and using your equity in this way. Here’s how it works:
Let’s say you owe $200,000 on your home, which has a value of $300,000. The difference is $100,000. That’s your equity. Depending on the amount of your new loan compared to the home’s value, cash-out refinancing could allow you to convert between $40,000 and $100,000 of your equity into cash depending on loan type. If you’re considering a cash-out refinance, an experienced loan officer can help determine this information for you based on your situation.
Why turn equity into cash?
With cash-out refinancing you don’t just get a better mortgage, it also gives you a way to take care of any personal or financial needs you might have.
- Pay down or eliminate high-interest credit card debt
- Consolidate multiple home loans for a single payment at a lower rate
- Pay off auto loans or other debt
- Cover college or other education expenses
- Remodel or renovate a home
- Take care of health related expenses
- Make real estate or other investments
- Accommodate a growing family, divorce or other life events
- Even take a dream vacation
Get cash you need and a lower rate.
If you’re still paying the original high interest rate on your mortgage, that alone is reason to refinance. Today’s rates are at historic lows, and won’t stay low forever. Cash-out refinancing could get you a lower rate before they go up, and give you access to a significant amount of cash.
A shorter term could mean a slightly higher monthly payment – but that’s not necessarily bad.
If you decide to go with a shorter term, your monthly payment might go up a bit. However, switching from a 30- to 15-year mortgage will give you significant savings over the life of the loan, and you’ll pay off your loan sooner. Additional benefits to consider include:
- With a shorter term, more of your monthly payments will be applied toward principle, and less toward interest. You’ll increase your home’s value by building equity faster. That’s kind of like paying money to yourself.
- If you use cash-out refinancing to eliminate credit card debt, you’ll free up money each month without the credit card payments – but don’t let that debt go back up!
- Unlike paying interest on credit cards, mortgage interest is tax deductible, which can mean a bigger tax return.*
- If you use your cash for remodeling or other home improvements, you’ll increase your home’s value while enhancing your quality of life.
Talk to a professional home loan expert. They can easily show you numbers comparing your current mortgage to a new mortgage. And the advantages available to you with a cash-out refinance.
Cash-out refinancing: What to watch out for.
Understand the interest over time: Even if you refinance your current high interest rate 30-year mortgage to a low rate 30-year mortgage, you could end up paying more interest over time when you include what you’ve already paid on your current loan.
Expect closing costs: You might be able to roll or include these costs into the loan so you won’t have to write a check at closing. Just be sure to figure out how long it will take until any savings from a lower rate or shorter term will offset those costs.
You’ll likely have a larger loan: Because you’re taking equity out of your home, the balance on your new loan will be bigger than your current loan – that’s more money to pay back.
Avoid credit card debt: If you use your cash to pay off credit card debt, take care that you don’t build that debt up again! Make a budget of all your weekly, monthly and yearly expenses. Work hard to stick to it.
Everyone’s personal and financial situations are different. No two loans are the same. Contact a PrimeLending Home Loan Expert who’ll help you decided if cash-out refinancing is the right fit for your personal or financial situation.
*PrimeLending is not authorized to give tax advice. Please consult your tax professional for tax advice for your specific situation.
From the PrimeLending blog, by special contributor Candace Rachels
Vice President, Product Development Manager
Candice Rachels is Vice President, Product Development Manager, who joined PrimeLending in December of 2014. Candice leads the Product Development department in developing an enhanced portfolio of home loan products for PrimeLending. Additionally, she is responsible for overseeing PrimeLending’s mortgage product guidelines and analyzing the suite of product offerings.
With more than 10 years of experience in the mortgage industry, Candice brings a wealth of experience to PrimeLending, having previously served as Vice President of Mortgage Operations for Weststar Mortgage Corp and various other positions in her mortgage tenure.
Candice earned a Bachelor of Science from Eastern New Mexico University.