Smart Ways to Reap the Benefits of A Cash-Out Refinance Home Loan

Refinancing your mortgage can be a great way to get access to cash from your home equity and put it to work for you. Refinancing can also be an opportunity to get a lower interest rate, extend the term of your loan, or both. Refinancing may not be right for everyone, but if you’re among the majority of homeowners who could benefit from doing it, it pays to know all the different ways you can do so. Refinancing is not one-size-fits-all. Depending on where you stand financially and what your short-term and long-term goals are, there are many different types of refinance that can suit different circumstances. However, as with any financial decision, refinancing your home comes with pros and cons that need serious consideration before proceeding.

Know your refinancing options before you apply

The first step in deciding how you want to refinance your home loan is to do your homework and make sure you know your refinance options. In particular, you’ll want to clearly understand the differences between cash-out refinance, equity refinance, and no- or low-equity refinance, and decide which one or ones would be a good fit for your specific situation. Cash-out refinance is the most common type of home refinance, but it is not the only option.

Cash-out refinance with no equity take-out

If you’re refinancing your home loan with the intention of taking cash out and using it for other purposes, you’ll want to make sure you have a plan in place to pay it back. A cash-out refinance with no equity take-out is one of the most common ways to do so. If you want to keep your original loan term and rate, but get a larger loan balance to benefit from a lower rate, this is the way to go. A cash-out refinance with no equity take-out will allow you to refinance your home with a new, larger loan. This can help you lower your rate, but it can also increase your monthly payments.

Refinancing to get a lower interest rate

A standard cash-out refinance with no equity take-out is great if you want to take out a new, larger loan and use the money to finance any number of things, including paying off high-interest debt. However, if your primary goal is to get a lower interest rate, a no-equity refinance will not work for you. That’s because to get a lower interest rate, you’ll need to refinance your home with a smaller loan. A smaller loan means less equity, which is the collateral you use to secure your loan. If you have no equity, then your lender will not be able to secure the loan with your house. For this reason, getting a lower interest rate requires a refinance with less equity, known as an equity refinance.

Refinancing to extend the term of your loan

Another common type of refinance is one that’s designed to extend the term of your loan. You can do this with a cash-out refinance or an equity refinance. You’ll typically want to do this if you’re already in the middle of a mortgage and don’t expect your income to increase any time soon, but you do have access to capital that otherwise isn’t being used. If you’re not under financial pressure to refinance—if you’re just looking to extend the term of your loan—you will likely want to go with an equity refinance. You’ll want to note, however, that if you extend the term of your loan, you will likely increase your overall interest payments down the line.

Reverse mortgage cash out refinancing

If you’re eligible for a reverse mortgage, you can use the money to refinance your home and pay off all or a portion of your existing mortgage. With a reverse mortgage, you are not required to pay back the loan. Instead, the loan is paid off at the time of your death or your move to a nursing home or other long-term care facility. A reverse mortgage cash out refinance is a great way to refinance your home and have one less thing to worry about. In addition to providing you with a lump sum of cash that you can use for whatever you like, a reverse mortgage can also help lower your monthly payments. Given that a reverse mortgage is essentially a form of debt, though, you’d do well to consider the long-term implications of this type of refinance.

Pros of refinancing your home loan

There are a lot of reasons that refinancing your home loan can be a good idea. Here are a few of them. - An opportunity to make changes to your mortgage terms: If you want to change your mortgage terms, such as the interest rate you’re paying or the number of years of the loan, a cash-out refinance is your best bet. - No need to pay off high-interest debt to get a lower interest rate: Unlike with a no-equity refinance, you can still get a lower interest rate on your mortgage even if you have high-interest debt. - An opportunity to invest in other things: Using the money from a cash-out refinance to invest in something that appreciates can help you build wealth over time. - Keep equity in your home: When you refinance your home, you have the option of keeping an equal or greater amount of equity in your home. This can protect you from having to sell your house if you ever run into financial trouble. - A chance to be prepared for future events: Whether it’s paying for the kids’ college tuition, covering medical expenses, or having a little extra cash on hand, a cash-out refinance allows you to put your home equity to work. - Reduced stress: A lower monthly payment, lower interest rate, and/or a larger cash-out amount can go a long way toward lowering your stress levels.

Cons of refinancing your home loan

There are also some potential downsides to refinancing your home loan. Here are a few. - Your monthly payment could go up: If you decide to extend the term of your loan, your monthly payment could go up. - You could lose equity in your home: You could lose equity in your home if you refinance with a smaller loan amount. - Additional interest payments down the road: If you extend the term of your loan, you’re likely to pay more in interest over the long run. - You may have difficulty getting traditional mortgage when you want to sell: If you refinance with a smaller loan amount, you’ll have less equity in your home. That could make it harder for you to get a traditional mortgage when you’re ready to sell. - The risk of paying off too much too soon: With a larger cash-out amount, you could find yourself paying off high-interest debt with money you could have saved in a savings account.

Equity Refinance

An equity refinance is similar to a cash-out refinance in that it allows you to refinance your home with a new, larger loan. However, a cash-out refinance is generally done to take money out of your home, while an equity refinance is used to put money back in your home. An equity refinance can be a great way to lower your monthly payment, pay off high-interest debt, or simply access the equity in your home. The trick with an equity refinance is that you have to have at least 20% equity in your home before your lender will consider it. So, if you have a $100,000 mortgage and you owe $80,000 on your house, you have $20,000 in equity. If you want to refinance with a mortgage with a higher amount, you must first put money back into your home to increase your equity. Most lenders will require you to put at least $10,000 down to do this.

Equity refinance

An equity refinance is similar to a cash-out refinance in that it allows you to refinance your home with a new, larger loan. However, a cash-out refinance is generally done to take money out of your home.

 

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