Wednesday, March 30, 2022 / by Joe Johnson
4 Ways a Cash-Out Refinance Can Help You Pay Off Debt
WHAT YOU'LL LEARN
What is a cash-out refinance?
How can it help me?
What are the risks?
Being a homeowner not only gives you a property where you can live and build memories with your family, it is also an investment from which you can draw funds if you need them.
If you have equity built up in your home—meaning your home is worth more than what you owe on your mortgage—it’s possible to use some of that value toward reducing your debt or paying for a major life milestone through a cash-out refinance.
What Is a Cash-Out Refinance?
To refinance means to exchange your current mortgage for a new one that saves you money in the long run; for example, by lowering your rate or shortening your loan term.
A cash-out refinance is a type of refinancing in which you take out an entirely new, bigger loan to replace your original mortgage, and you pocket the difference at closing. The amount you receive depends on your equity, financial profile, and loan program.
4 Ways a Cash-Out Refi Can Help
A cash-out refi can help in many ways, like when a large repair is necessary, a major life event occurs, or you simply want to better your financial future. For example, you can:
Pay off high-rate debt. Would you like to be free of car loans, student loans, or credit card debt? These “unsecured loans” can carry high rates that cost more in interest. A cash-out refinance will likely have a much lower rate, potentially saving you thousands. And if you use a cash-out to pay down credit cards, you may see a rise in your credit score because you are reducing the amount of credit you’re using.
Home improvements. Not only can you enjoy that new spare bedroom or roof while you live in your home, but they give you more value in equity and future resale. You can also borrow more money for less interest with a cash-out refi than a credit card will allow on a large-scale home update.
Put money toward investments. If you have enough money in savings, you can use cash-out funds toward beefing up your retirement accounts or building a college fund. You might also start a new business or fund the down payment for an investment property. Or you could put the money into the stock market, but talk to your financial planner and tax advisor first for guidance.
Life’s unexpected events. Maybe you’re finally ready to get that graduate degree, or your child has grown up and met “the one.” A cash-out refi can provide the funds for weddings, travel, and other once-in-a-lifetime occasions.
Cash-out refinances are best for significant purchases and come with the same closing costs as a regular mortgage, roughly 3-5% of the loan amount. So if you need a couple thousand for some kitchen appliances, you’ll want to find another path.
Cash-Out Refi Rules and Risks
Before you take out a cash-out refi, you should familiarize yourself with the downsides:
A refinance is a whole new mortgage with new terms, and cash-out refis are considered higher-risk. No matter your financial situation when you first purchased, you’ll need solid employment history, income, and creditworthiness to refinance now.
You are putting up your home as collateral and can lose it if you don’t pay the loan back.
You will have to pay closing costs.
Depending on what you paid when you bought your home and your current financial situation, your rate and monthly payment might go up.
If you borrow more than 80% of your home’s value, you will have to pay private mortgage insurance (PMI).
Want to know more about refinancing? Our Knowledge Center has 8 tips for you.
The Bottom Line
Whether it’s an exciting life event or smart debt consolidation, at some point in life, we can all use some extra money. A cash-out refinance can be a helpful option—as long as you understand the potential pitfalls. Be sure a cash-out refi payment fits your monthly budget before you risk your home.
Need help figuring out your next move? The Reiner Realty Team can help! Call us today at 540-494-9284 or click HERE for more info.