When Is Cash-Out Refinancing a Good Idea?

When Is Cash-Out Refinancing a Good Idea

Should I consider cash-out refinancing to buy an investment property? How about refinancing to pay off debt? Learn all about cash-out refinancing below. 

Cash-out refinancing is an enticing option for many homeowners because it has a variety of uses, some of which can be financially beneficial. Read on to learn more about cash-out refinancing and when you should (and shouldn’t) do it.

What Is a Cash-Out Refinance?

A cash-out refinance is the process of replacing your current home loan with a new, bigger loan. This allows you to take out a lump sum of cash from the difference between the old and new loans. You can use this sum in any way you want, although the most common usages involve paying for home improvements, consolidating debt, purchasing investments, and paying for college. 

If you are thinking of getting a cash-out refinance, it is important to talk to an experienced, top-ranked mortgage lender who can properly guide you through the process and recommend the best lending options. 

What Is a Limited Cash-Out Refinance?

Limited cash-out refinancing replaces your current home loan with a new one, just like regular cash-out refinancing. However, instead of the money coming from your home’s equity, it will come from covering the variances between the actual loan payoff amount and the estimated figure.

This option allows you to get a small sum—usually $2,000 or less—that you will have to repay eventually. This money comes from the costs associated with the refinance and instead of paying it upfront, it is worked into your loan. Through this process, you receive the cash now and pay it back later.

Can You Sell Your Home After Refinancing?

Yes, you can. Depending on the lender, though, there may be rules in place that will make it more challenging. For example, you may run into an owner-occupancy clause that prevents you from selling for 6-12 months—or a prepayment penalty.

To ensure that refinancing will work to your advantage, contact an experienced mortgage broker. 

Should You Get a Cash-Out Refinance?

There are many reasons people choose to refinance. Here are some things to consider when you are making a decision:

What You Can Do Through a Cash-Out Refinance

Since you receive a lump sum through a typical cash-out refinance, you can essentially spend it on whatever you want. However, the most common ways to spend cash-out sums involve investments or wise financial decisions that will benefit you in the long term.

Many people add the extra cash to their savings or use the money for home improvement projects. This is often done with the purpose of increasing the value of your home. Others may get a cash-out refinance to buy investment properties, which they would typically have to wait years to afford; others, to consolidate debt.

Refinance to Pay Off Debt

One of the most common ways people spend refinancing sums is to pay off debt. Because refinancing is often the cheapest option for borrowing money, it can be a very smart decision when you’re confronted with a high-interest debt like student loans. 

When you are considering refinancing to pay off debt, try to think about how much money you would get from the refinancing, how the interest rates compare among the loan options available, and any other relevant factors.

Make Refinancing Work for You

While refinancing is a great option that can benefit you financially, it also is potentially risky. It is important to spend your refinance money wisely.

Don’t refinance for extra, unnecessary expenses like paying for a vacation, buying a car, or buying any other type of depreciating non-essentials. You should also avoid refinancing when you’re approaching retirement because you probably wouldn’t want to deal with mortgage payments at a time where you may not have an income.

Are you planning to sell your house? If yes, when? Do your due diligence and research extensively on what your next steps should be. You should also spend time reviewing the terms of your loan. Depending on your situation, refinancing may be more damaging than helpful. Be smart and only refinance if you have a good reason to do so.

Why You Should Consider Getting a Cash-Out Refinance

Cash-out refinancing is a wonderful way to get a lot of money instantly. With a cash-out refinance, you can drastically reduce interest payments on debt, raise your property value, pay for education, and do so many other things that are out of reach otherwise.

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