Cash-in refinancing: what you need to know

Withdrawal refinance text on document form isolated on desk.
Be sure to do your research to determine if a cash-out refi is right for you.

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If you need money for home repairs, medical bills, or to pay off debts, a cash refinance could help. This type of refinancing allows you to tap into the equity in your home and turn it into cash, which you can then use for virtually any purpose.

Cash-out refinances are not suitable for everyone, however. Here’s what you need to know if you’re considering one.

What is a cash refinance?

A cash-out refinance is exactly what it sounds like: a mortgage refinance that lets you take cash out of your home.

A mortgage refinance can be a good idea if you plan to stay in your home for the next few years. If you are looking to withdraw money, complete this quick survey to determine your next steps and potential future savings.

Here’s how it works:

  1. Take out a new mortgage for more than your current mortgage.

  2. Use the new loan to pay off your old one, essentially replacing it.

  3. After closing, you get the difference between those numbers (your old mortgage balance and the new one) in cash.

You can then use these funds for any expenses you may face. Some owners use them to pay off high-interest debt. Mortgages tend to have lower interest rates than credit cards and other financial products (like personal loans), so this strategy can help save on long-term interest.

Before refinancing your mortgage, it’s a good idea to see what type of interest rate you qualify for depending on your financial situation.

How much money can you get?

Most mortgage lenders allow you to withdraw up to 80% of the value of your home. So if your home is worth $500,000, you could potentially get up to $400,000 out of it.

Remember that part of this amount must be used to pay off your old balance. So, to calculate the maximum amount of money you can withdraw, you’ll first need to subtract your existing mortgage balance.

If you had a current balance of $225,000, for example, you could get up to $175,000 in the scenario above ($400,000 – $225,000).

Is cash refinancing a good idea?

The big advantage of cash-in refinancing is that you can access a lot of money and use those funds for any purpose. They also come with lower interest rates than most other financial products, and they also have long tenors, meaning you won’t need to pay the money back (at least in full) for a while.

Finally, if you itemize your returns, interest paid on mortgages is tax deductible. This can reduce your taxable income and, subsequently, the annual taxes you owe.

However, your monthly payment could increase. You will also need closing costswho, according to Freddie Mac, costs around $5,000 on average. On top of that, you’ll have to replace your current mortgage with a new one, which could mean a higher mortgage rate or a longer repayment term.

There is a risk to think about. If you withdraw too much money and the value of your home drops, you could end up owing more than the home is worth. Also, if you can’t make your new payment, you could be at risk of foreclosure.

Advantages of cash-in refinancing

  • Potentially large loan amounts
  • Long-term profitability
  • Can use the funds for any purpose
  • Lower interest rates than other financial products
  • Interest is tax deductible

Disadvantages of cash-in refinancing

  • Requires closing costs
  • Replaces current mortgage terms, which could mean a higher rate or longer repayment term
  • This may mean a higher payout
  • Increases your risk of seizure

When to use cash refinance

The right time to use a cash-out refinance depends on your personal situation, your current mortgage, and your goals for the extra money.

Cash-in refinancing may make sense if:

  • You have the funds to comfortably cover a higher monthly payment.
  • You have to pay high interest debts like credit cards.
  • You face expenses that you would otherwise have had to pay for a credit card or other high-interest product.
  • You need to repair your house or make improvements.

Cash-in refinancing may not be appropriate if:

  • You are short of funds.
  • Refinancing your loan would mean losing an extremely low interest rate.
  • Home values ​​are dropping in your area because it could cause you to lose your mortgage (due to more than it’s worth).

HELOC vs cash-in refinance

Cash-in refinancing isn’t your only option if you want to leverage the equity in your home. You can also use a home equity loan or a home equity line of credit (HELOC).

These are two types of second mortgages that you pay on top of your existing mortgage payment. With a home equity loan, you get a lump sum payment. HELOCs work more like credit cards. You can opt out if needed for an extended period.

You could also sell your house. If you’re considering this, talk to a local real estate agent. They can help you assess the sale price of your home, given current market conditions.


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