Cash-Out Refinance in Relation to Home Loans
What is Cash-out Refinance?
Do you want to refinance your home, but also need money to pay for life’s expenses? A cash-out refinance could be the perfect solution. A cash-out refinance allows you to take out a mortgage that’s larger than your current home loan-- and you get to keep the difference, in cash.
For example, if you own a $400,000 house and owe $150,000 on the current mortgage, you have $250,000 in home equity. If you needed $40,000 to pay an expense like medical bills or a child’s college tuition, you could potentially take out a loan worth $290,000. Just like a regular home loan, you’ll have to pay closing costs on a cash-out refinance-- and, depending on your lender, that can get somewhat pricey.
How Can You Use Money From A Cash Out Refinance
While you can technically use money from a cash-out refinance for anything, that doesn’t mean you should. Though getting new rims on your car or buying a new watch might be fun at first, it can be a lot smarter to spend the money on something that will improve your financial future, like paying off high-interest credit card debt or making high-quality home improvements (especially ones that have a high ROI).
Cash Out Refinance Requirements
Much like other kinds of home loans, cash out refinancing has its restrictions. First, you’ll likely need to have a specific minimum credit score, which is determined by your individual lender. Often, this score will be somewhat higher than the score required for a typical (non-cash out) refinance. Next, you’ll need to have owned your home for at least one year. You’ll also likely need a loan-to-value ratio (LTV) of 85% or more.
Who is the Ideal Borrower for a Cash Out Refinance?
Taking on a cash-out refinance can be a great idea in some situations, but it isn’t for everyone. If you can get a better interest rate than you currently pay on your mortgage, you feel confident that you can repay the loan, and you intend to use the cash for a good purpose (not gold watches and big chains), then it could be a great fit.
In contrast, if you’d have to pay a higher rate for your refinance, don’t know if you can make your new mortgage payments, and only want some extra spending money, you’re probably better off staying with your current home loan. Before deciding to go with a cash-out refinance, you might also want to check out getting a home equity loan or home equity line of credit (HELOC), as these can also be effective ways to tap into your home’s equity.