In recent years cash-out refinancing has become popular with homeowners. Cash-out refinancing enables homeowners to take advantage of the increasing value of their property in the form of cash. Homeowners are able to use the cash from a cash-out refinance in a variety of ways. There are several smart reasons to cash out. One of the smartest reasons to consider a cash-out refinance is to consolidate high-interest non-mortgage debt.
In the following article, we are going to discuss several reasons to consider a cash-out refinance.
Eliminate or Reduce High-interest Rate Debt
A great way to use cash-out refinancing is to consolidate high-interest rate non-mortgage debt, like credit cards. If you apply the cash from your cash-out refinance to consolidate high-interest rate debt, you can potentially save money each month.
Here is a typical example of debt consolidation:
Daniel is a homeowner from Escondido. He wanted to take advantage of the increased value of his home with a cash-out refinance. Cash-out refinancing would help Daniel reduce his monthly payments on high-interest rate non-mortgage debt. At the time of the refinance, Daniel had $23,634 non-mortgage debt at an average interest rate of about 18%. These loans cost him $495 per month.
Daniel qualified for a cash-out refinance with a mortgage lender. The value of his home in Escondido was $200,000 at the time of the refinance. Also, he had $88,965 in home equity.
The cash-out refinance increased his monthly mortgage payment by $43 but eliminated his $495 payment on high-interest rate debt. To sum up, he saved $452* per month with a cash-out refinance.
Get Cash for Pretty Much Anything
Home values have significantly increased over the last several years in many places. If you have been in your home for more than a few years, it is likely that you have built up significant equity. Cash-out mortgage refinancing is a way for homeowners to access the cash from their equity.
The cash from refinancing can fund almost anything. Home improvement is one such example. Typical home improvements include an upgraded kitchen, new deck, or even a full addition. Alternatively, the cash can be used for consumer items like a new vehicle, but this might not be the best use of the cash. This is because a typical mortgage will have a 15 or 30-years long term, whereas many consumer items will have a shorter life.
There are other good reasons to get a lump sum from a cash-out refinance. For example, a cash-out loan refinancing may be easier to get than other kinds of loans. For instance, using the cash from a refinance to fund a new business instead of applying for a business loan.
Refinance To Reduce Your Mortgage Interest Rate
Home mortgages that are older may be at higher interest rates than those available today. You may qualify for a mortgage with a lower interest rate if you have improved your credit. Indeed, a higher interest rate loan combined with higher home value is a prime opportunity to do a home refinance with cash-out.
Cash-out mortgage refinancing could give you access to tax-free money. The lump sum of cash is in addition to reducing your interest rate. Above all, reducing interest rates has the potential to reduce monthly payments or shorten the loan term. Consult with your tax professional about mortgages and taxes.
Refinance To Improve Your Credit Score
A home loan refinancing with cash-out can improve your credit score by consolidating debt. Keeping your credit card balances low can positively impact your credit score.
A better credit score is important for several reasons. Some of these include better credit card deals or lower interest on future loans.
Refinance To Simplify Your Finances
Dealing with many creditors every month can be overwhelming. Also, having a lot of high-interest loans can cost you a lot of money over the years. Examples of high-interest debt are credit cards, student loans, and car loans. You might be able to replace your high-interest debt payments with a single monthly payment. After using the cash to repay high-interest debt from refinancing, you will have fewer bills to worry about. When you consolidate your debt, your payments will become easier to manage. Besides, having fewer debt accounts can make tracking finances a much easier process.
Do you need extra cash to consolidate non-mortgage debt, to pay for college tuition, or to cover the cost of remodeling your home? You might be able to use home equity to get cash. The equity in your home is the difference between what you owe on the property to your mortgage company and its value. Many homeowners choose to cash-out some of their home equity through a “cash-out refinance.”
What is Cash-Out Refinancing?
A cash-out refinance is also called a cash-out mortgage or a cash-back mortgage. It is one of several types of home loan refinance options. Cash-out refinance replaces your current mortgage with a new home loan. With a cash-out refinance, you refinance your mortgage and take out some equity as cash. This type of refinancing is also called a cash-back refinance or a cash-back mortgage, and it is a popular option for homeowners with substantial home equity.
How Does Cash-Out Refinancing Work?
Cash-out refinancing requires that you have sizable equity available in your home. But you have limits on what you can cash-out. Many lenders require at least 20% equity remaining after you take cash-out. It reduces the risk involved. To put it another way, you can’t take out 100% of your home’s equity.
From a numbers standpoint, let’s pretend that your primary residence is appraised at $250,000. You have $100,000 in equity in it. If you were to go through with a cash-out refinance, you would refinance the $150,000 you still owe. Then, you could take out up to $50,000 of the equity you have in the house – minus fees. The remaining $50,000 is the 20% equity most lenders need you to keep in place.
Per the new tax laws, you might be able to deduct the mortgage interest you pay on your home up to $750,000. The interest you pay on the cash amount might be tax-deductible too. You might be able to deduct the interest on the cash if you use it for home improvements. But you can’t deduct the interest if you pay off debt or pay for college tuition with it. Please consult your tax advisor for all tax-related questions.
For a complete explanation from the IRS of the Mortgage Interest Deduction, please click here.
What Can I Use the Cash from the Refinance?
How you use the money from the cash-out refinance is up to you. Some people use it for education expenses while others use it for home renovations. One frequent use is to consolidate high-interest non-mortgage debt.
Consider how a mortgage company helped Daniel from Escondido with a cash-out refinance to consolidate his high-interest non-mortgage debt. At the time of the refinance, Daniel’s home appraised at $200,000, and he had $88,964 in home equity. Daniel’s non-mortgage debt was $23,634 and had an interest rate of about 18%. Daniel qualified for a cash-out refinance. His mortgage payment increased by $43 a month. But he decreased his monthly payments by $495 a month when he used the cash to consolidate his non-mortgage debt. Daniel lowered his monthly payment by $452* by opting for a cash-out refinance.
Cash-out refinance is one way to use the equity in your home. You can use the cash for anything, from home improvements to paying for college tuition to consolidating high-interest debt. Keep in mind that, like any mortgage product, you will have closing costs and interest rates to consider. Be sure to consult with an expert mortgage professional to make the best possible choice for your circumstances.