A cash refinance is one way to leverage the equity in your home. In fact, it can turn your capital into cash, which you can use for virtually any purpose – home repairs, tuition, medical bills, renovations, or even to pay off debt.
There is no limit to how the money can be used and it is often a good option when the alternative is to rack up more debt.
Are you considering a cash refinance? Lenders can help you figure out what you qualify for right now.
Here’s what you need to know about the cash-out refinance process and when it might (or might not) be a smart move.
What is cash-out refinancing and how does it work?
A cash refinance is a type of mortgage loan that allows you to get cash back at closing. The process involves replacing your current mortgage with a larger loan and then using those funds to pay off your existing loan. You then collect the excess amount – the difference between your new loan balance and your old one – in cash.
Once you complete a cash-out refinance, it completely replaces your existing mortgage. You will pay it back monthly, plus interest, until the loan is paid off.
Advantages and disadvantages of cash-in refinancing
Refinancing by cash-out has many advantages. You can use the funds for anything, and there are tax benefits too (you can deduct the interest you pay from your taxable income).
You’ll usually get a lower interest rate than other financing products, like credit cards or personal loans. A credit card can easily be associated with double-digit APRs. Mortgage rates, on the other hand, have averaged between 2% and 5% over the past 10 years. This means that if you need cash, a refinance is often a more affordable choice than paying by credit card.
If this sounds like something you might be interested in, you can start the refi process today.
The downside is that refinancing replaces your existing loan, which may or may not work in your favor. This could mean a higher interest rate or monthly payment than your current loan, or it could extend your term, which could result in longer-term interest charges.
There are also closing costs to consider (Freddie Mac estimates they’re around $5,000 per refinance), and you could be overstretched. If you are unable to make your new higher payment, this could put you at risk of foreclosure.
Cash-out refinancing alternatives
A cash refinance isn’t the only way to access your home’s equity. There are also other products you can use to turn your equity into cash. These include:
- Home Equity Loans: Home equity loans are a type of second mortgage. They allow you to borrow some of the equity in your home and pay it back over time, plus interest. They come with a monthly payment (on top of your existing mortgage payment) and give you a lump sum cash payment at closing.
- HELOC: HELOCs, or Home Equity Lines of Credit, are similar to home equity loans, except you can withdraw them over time (much like a credit card). During the first 10 years of the loan, called the drawdown period, you will generally only make interest payments. After that time, you’ll make monthly payments, plus interest, until your balance is paid off.
Selling your home is another way to leverage your capital. If you’re considering this route, you can ask a real estate agent for a Comparative Market Analysis (CMA), which can give you an idea of what your home might sell for in today’s market.
Eventually (and especially if you want to keep your home) refinancing may be your best option.