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Every household has their own reasons for pursuing a cash-out refinance, but home repairs and renovations, refinancing higher-interest debt. How to Use Your Personal Savings, Reasons for a Cash-Out Refinance
and purchasing an investment property are all popular ways to use your home equity as a financial tool.
If you’re considering a cash-out refinance, here’s what you should know:
>> How does a cash-out refinance work?
>> How much money can you get from your home or business?
>> 7 ways to put your cash-out refinance to work for you
>> Other options for accessing your mortgage debt
How does a cash-out refinance work?
A cash-out refinance is when you get a new mortgage that is larger than your old one. Your existing mortgage will be paid off, and the remaining funds will be deposited into your bank account by the lender. You are free to spend that money however you see fit. How to Use Your Personal Savings, Reasons for a Cash-Out Refinance
When it comes to determining who qualifies for a cash-out refinance, lenders have some leeway. Here’s what they’re looking for most of the time:
>> A credit score of at least 620 is required.
>> A debt-to-income ratio (DTI) of no more than 50% is recommended.
>> After cashing out, you’ll still have 20% equity in your property.
You can, but you don’t have to, perform a cash-out refinance with your current lender. You should shop around for the best offer.
Credible makes comparing refinance rates from several lenders simple. It simply takes a few minutes to check prices, and it is completely free and has no impact on your credit score.
How much money can you get from your house?
To qualify for a cash-out refinance, you must have a certain level of home equity (the value of your home minus the amount you owe on your mortgage). How to Use Your Personal Savings, Reasons for a Cash-Out Refinance
When you perform a cash-out refinance, lenders normally enable you to borrow up to 80% of the value of your house using a conventional or FHA loan. This means that if your home is worth $350,000, you will have to pay $350,000 in taxes.
If your existing mortgage debt is $200,000, a cash-out refinance might net you $80,000 after closing fees.
You can borrow up to 100% of your home’s worth with a cash-out refinance with a VA loan. A cash-out refinance’s proceeds are not taxable.
7 ways to put your cash-out remortgage to work for you
Making repairs or enhancements to your property is one of the most obvious ways to use a cash-out refinance.
However, because you can spend the money however you wish, you could use a cash-out refinance to pay for other important expenses such as debt consolidation or higher education.
Home remodeling projects can be funded in a variety of ways.
- When it makes sense: When putting off repairs will cause harm to your home, or when upgrading your home will keep you from having to move.
Even the most conservative financial advisor would probably approve of borrowing against your house to perform necessary home repairs when interest rates are low.
When you’re short on room and don’t want to leave, another financially sound use of a cash-out refinance is to expand your home to accommodate additional people.
Getting out of debt using a credit card
- When it’s appropriate: Financial experts advise against refinancing your mortgage to pay off high-interest debt, especially if you haven’t modified the conditions or practices that got you into debt in the first place.
And it’s a valid concern: you don’t want to end up in even more debt by using your home as a security deposit.
Student loan repayment
- When it’s appropriate: You don’t qualify for an income-driven repayment plan; you can’t deduct student loan interest; and you need to pay off your student loans as soon as possible.
Student loans often have single-digit interest rates, making them a very cheap form of debt, especially if you have federal loans and are eligible for income-driven repayment. How to Use Your Personal Savings, Reasons for a Cash-Out Refinance
If you don’t qualify for payment plans or tax deductions that make your loans more affordable or simply want to pay them off sooner you can convert your student debt to home debt.
Paying off high-interest loans and credit cards with low-interest mortgage debt, on the other hand, can often provide the new start people need to get their finances back on track. When you spend less of your monthly money on interest, it’s easier to form new, positive habits that benefit you.
Investing in a college education for a child
- When it’s appropriate: You don’t want to put your child in debt because of college loans. It can be difficult to decide how to pay for a child’s college education. Specialists frequently advise that it is better for the student to borrow than for the parents to jeopardize their retirement funds.
However, there may be times when taking on low-interest home debt to help a child attend college debt-free makes sense, such as if your child has a strong work ethic that makes them likely to graduate and is ready to work to help pay for their education.
Purchasing a rental property for investment
- When it’s appropriate: You have a sizable emergency fund and are willing to shoulder the burden of owning two residences.
Managing and maintaining two houses is time-consuming, costly, and occasionally frustrating. It takes a lot more effort than investing in an index fund.
There are, however, compelling reasons to invest in real estate, such as the possibility of financial appreciation particularly on a fixer-upper in a desirable location or the ability to live in the property in the future.
- When it’s appropriate: You have a sizable emergency savings and a solid understanding of investment. Reducing your home equity to take on the risk of investing in the stock market is generally not a good choice for most people. How to Use Your Personal Savings, Reasons for a Cash-Out Refinance
If the cash-out refinance terms are extremely favorable, you have good credit, and you have a big emergency fund that covers six months or more of living expenses, it may make sense.
If a cash-out refinance to invest would enhance your monthly cash flow and allow you to contribute the maximum amount to tax-advantaged retirement plans, it might be worth it in the long run.
Taking care of unexpected costs
- When it’s appropriate: You’re still employed, and the money will take at least 60 days to arrive.
If you become sick or injured and need cash to pay for treatment or for living expenses while you recuperate, a cash-out refinance could be a suitable solution to cover unexpected expenses.
This technique might work if your household still has enough income to qualify for a cash-out refinance.
However, refinancing isn’t a quick way to get cash. According to the latest Origination Insight Report from ICE Mortgage Technology, the average time to close a house loan was 53 days in April 2021.
Other options for accessing your home equity
These options for accessing your home equity may be more suitable for your needs than a cash-out refinance.
Taking out a home equity loan
- Consider the following scenarios: You already have a wonderful interest rate on your mortgage. A home equity loan’s closing fees should be significantly cheaper than a cash-out refinance’s closing charges.
A home equity loan may be a better option than a cash-out refinance if you need a lump sum at a fixed rate but are content with your current mortgage.
A line of credit secured by your home (HELOC)
- Consider the following scenarios: You have an excellent first mortgage rate and want to be able to borrow smaller amounts on a regular basis.
A home equity line of credit (HELOC) allows you to draw against the equity in your home as needed, up to your credit limit. It can be a fantastic method to borrow as you go and only pay interest on the money you need right now if you’re completing a series of home renovations over time.
HELOCs frequently allow you to make interest-only payments for the first several years, which can keep your monthly payments extremely low. This sort of second mortgage, unlike a home equity loan, has a variable interest rate that might go up or down. Many lenders, on the other hand, will allow you to do so.
Using a reverse mortgage
- Consider the following scenarios: To qualify for a reverse mortgage, you must be at least 62 years old and have no or a minor mortgage balance.
If you wish to age in place and your house is your most valuable asset, this type of financing may be appropriate.
Reverse mortgages are a complicated product with high fees, but they may be a smart option for some homeowners.