5 Reasons to Get a Cash-Out Refinance
Your Home’s Equity Can Help You Get Cash
A cash-out refinance allows you to replace your current mortgage with a new loan for a higher amount, providing you with the difference in cash at closing. For instance, if you currently have a $200,000 mortgage, you might refinance for a $250,000 mortgage and receive $50,000 in cash at closing.
What can you do with cash-out refinances? Here are some common reasons homeowners choose to refinance and access cash.
Can You Consolidate Debts with Cash-Out Refinances?
Absolutely! Cash-out refinances can be an effective way to consolidate debts, especially if you have high-interest debt from credit cards or personal loans. Mortgages generally have lower interest rates than other types of debt, allowing you to reduce your overall interest payments and apply the savings toward paying down your other obligations.
Consolidating debts also simplifies your financial management. Instead of juggling multiple payments each month, you could streamline your finances by making just one payment.
Can You Pay for Home Improvements with Cash-Out Refinances?
Yes. Financing home improvements and repairs is a popular use of cash from refinancing. You can use the funds for various projects, such as building an addition, finishing an attic or basement, remodeling kitchens and bathrooms, or making significant repairs to roofs, foundations, plumbing, electrical systems, and HVAC systems. The cash can also be allocated for new paint, carpeting, appliances, and other home upgrades.
Remember, you don’t have to limit the cash to a single purpose. You could allocate part of the funds toward home improvements and use the rest for debt consolidation.
Can You Pay for College and Investments with Cash-Out Refinances?
Yes. Utilizing your home equity for educational expenses is a viable option. Investing in education can significantly enhance your or your family’s professional opportunities. Additionally, cash from refinancing can be used to start a business, purchase rental or investment properties, or help fund other significant financial goals.
Can You Lower Your Interest Rate with Cash-Out Refinances?
Yes, it’s possible to secure a lower mortgage interest rate through a cash-out refinance. Since this process involves obtaining a new mortgage with updated rates and terms, you might qualify for a better rate than your current loan, depending on your existing rate and current market conditions.
This sets cash-out refinances apart from Home Equity Lines of Credit (HELOCs) and home equity loans, which are considered second mortgages and maintain the original mortgage's terms and rates.
Can You Change to a Fixed-Rate Loan with Cash-Out Refinances?
Yes, refinancing can enable you to switch from an adjustable-rate mortgage to a fixed-rate mortgage. Additionally, you can adjust the length of your mortgage term.
Extending the term may lower your monthly payments, but it could increase the total interest paid over the loan's lifespan. Conversely, shortening the term might raise your monthly payments but could save you money on interest overall.
What Else Do You Need to Know About Cash-Out Refinances?
To qualify for cash-out refinancing, you’ll need a significant amount of home equity. This process requires applying for a new mortgage, meeting credit and financial standards, providing necessary documentation, and covering closing costs.
It’s important to note that refinancing to access cash may lead to higher minimum monthly payments and increased total interest over the life of the loan, as you will be borrowing more. Carefully weigh the benefits against the costs to make an informed decision that aligns with your financial goals.