Building equity in your home is one of the major benefits of buying – but what if you need to tap into that equity? A cash-out refinance is one way that you can achieve this goal, but there are several considerations you should take prior to pursuing it. Let’s explore what a cash-out refinance is, how it works, and what you should know before deciding if this loan type is right for you.
A cash-out refinance is a new loan that replaces your existing mortgage for one with a higher balance (based on your home’s current appraised value). After paying off your current mortgage, other liens, and closing costs, you receive the equity difference between your new and old balance in cash based on the loan-to-value. Those funds can be put toward home improvements, debt consolidation or another financial need.
As you might have guessed, in order to use a cash-out refinance, homeowners must have equity built up in their house. During the process for a cash-out refinance, your home is appraised. At closing, you receive part of the difference between the new mortgage balance and your home’s value – less any fees that are accrued. Cash-out refinances are typically limited to 80% of your home’s equity. This is to say that you can’t cash out 100% of your home’s equity.
One major advantage that makes this loan type an attractive option: interest rates for a mortgage refinance are also typically lower than those for home equity lines of credit (HELOC) or a home equity loan.
Borrowers should be cautioned, however, that there are a few drawbacks. As with any home loan, your house is the collateral. If you are unable to pay your mortgage, you risk foreclosure. For this reason, most financial experts do not advise a cash-out refinance to pay off credit card debt.
Whether you’re ready to get a jump on your next quarantined home improvement project or start a new chapter in some other way, a cash-out refinance could be the mortgage option you’re looking for. Learn why you should choose Apex for your mortgage refinance and contact us to get started!