A Guide to Cash Out Real Estate Refinancing

Are you considering a cash-out real estate refinance loan? If so, you’re not alone. A growing number of homeowners are taking advantage of this type of refinancing to access the equity they’ve built up in their homes.

What is Cash-Out Refinancing, and How Does it Work?

Simply put, a cash-out refinance loan is a new mortgage loan that pays off your old mortgage loan. The new mortgage loan is for a higher amount than your old one, and you get the difference in cash.

For example, let’s say you have a $100,000 mortgage loan with an interest rate of 5%. You refinance to a new mortgage loan with an interest rate of 4%. The new loan is for $150,000, which is $50,000 more than your old loan. You get the $50,000 in cash and use it however you want.

People do cash-out refinances mainly to access the equity they’ve built up in their homes. Equity is the difference between your home’s value and how much you still owe on your mortgage loan.

For example, let’s say your home is worth $200,000, and you have a $100,000 mortgage loan with an interest rate of 5%. You have $100,000 in equity. If you do a cash-out refinance loan for $150,000, you get $50,000 in cash that you can use at your discretion.

The Benefits of Cash-Out Refinancing

Here are some of the benefits of cash-out refinancing:

• Get Better Rates: Homeowners always look for easier and better ways to pay off their mortgages. A cash-out refinance loan provides exactly that. Beneficial cash-out refinance loans provide borrowers with lower interest rates than they originally had on their mortgage, effectively reducing the total interest paid on the loan.
• You Can Shorten Your Loan Term: By refinancing into a new mortgage loan, you can shorten the term of your previous loan. This means you get to pay off your previous unfavorable loan faster while enjoying better loan terms on your new loan.
• You Can Get Cash for a Major Purchase: If you have a large expense like a home renovation or medical bills, you can use the cash from your cash-out refinance to help cover those costs.
• You Can Consolidate Debt: If you have high-interest debt like credit card debt, you can use the cash from your cash-out refinance to pay off that debt. This can help you save money on interest and get out of debt faster.

How to Qualify for a Cash Out Refinancing Loan?

The requirements for qualifying for a cash-out refinance loan are similar to the requirements for qualifying for a new mortgage loan. Here’s what you’ll need:

1. A Good Credit Score: You’ll need a good credit score to qualify for a cash-out refinance loan. A good credit score is usually defined as a score of 680 or higher.
2. Equity in Your Home: As we mentioned above, you’ll need to have equity in your home to qualify for a cash-out refinance loan. How much equity you need will depend on the lender, but most require at least 10-20% equity.
3. A Steady Income: Lenders will want to see that you have a steady income to make sure you can afford the new loan payments.
4. Documentation of Your Financial History: You’ll need to provide documentation of your financial history, including tax returns, pay stubs, and bank statements.

If you meet all of the above requirements, you should be able to qualify for a cash-out refinance loan.

Things to Consider Before You Refinance Your Mortgage

Before you refinance your mortgage, there are a few things you need to consider:

1. Refinancing Costs: Refinancing comes with closing costs, appraisal, and origination fees. These costs can add up to some extra thousand dollars, so you need to make sure they’re worth it before you refinance.
2. The Interest Rate: The interest rate on your new loan will be one of the most important factors in deciding whether or not to refinance. You should compare rates from multiple lenders to ensure you’re getting the best deal.
3. Your Credit Score: Your credit score is another important factor to consider before refinancing. If your credit score has improved since you got your original mortgage, you may be able to get a better interest rate.
4. Your Financial Goals: Before refinancing, you need to consider your financial goals. Are you trying to save money on interest? Pay off debt faster? Make sure your new loan helps you meet your financial goals.

How to Get The Best Deal on a Cash Out Refinance Mortgage?

If you’re thinking about doing a cash-out refinance, here are a few tips to help you get the best deal:

1. Shop Around: When refinancing, you should always shop around to find the best deal. There are a lot of different lenders out there, so it’s important to compare rates and terms to find the best one for you. Leading lenders like Blake Mortgage often provide one of the best rates, so it would be advisable to check them out first.
2. Know Your Credit Score: As we mentioned above, your credit score is one of the key factors lenders will look at when considering you for a loan. So, it’s important to know your credit score and work on improving it before you apply for a loan.
3. Have Realistic Expectations: You should have realistic expectations regarding refinancing. It’s not going to be a magic solution to all your financial problems, and it’s not going to make your debt disappear. You should only do it if you’re sure you can afford the new loan payments and if it makes financial sense for you.

The Risks of Cash-Out Refinancing

There are a few risks to be aware of when doing a cash-out refinance:

1. You Could End Up Owing More Than Your Home is Worth: If you borrow too much money and the value of your home decreases, you could end up owing more than your home is worth. This is called being “underwater” on your mortgage.
2. You May Have to Pay Private Mortgage Insurance: If you do a cash-out refinance and borrow more than 80% of your home’s value, you may have to pay private mortgage insurance. This is an extra cost you will have to pay monthly on top of your mortgage payment.
3. You Could End Up Paying More Interest Over Time: If you extend your loan term when you do a cash-out refinance, you could end up paying more interest over the life of the loan.
4. You Could Have Difficulty Qualifying: Because you’re taking on additional debt with a cash-out refinance, there is a chance that you could have difficulty qualifying for the loan if your financial situation has changed negatively since you originally got your mortgage

Is a Cash Out Refinance Loan Right for You?

The decision to get a cash-out to refinance a loan is personal and one that you should make after reviewing your financial situation. However, this is usually a good idea for many people as it allows them to access better loan terms while providing additional cash to pay off some major expenses and settle the debt.

If you’ve built up considerable equity on your home and have some major debts and expenses to take care of, then a cash-out refinance loan is a good idea for you. All that’s left is to find a lender that can provide you with the new loan and cash you need.