(ThyBlackMan.com) If you’ve built up equity in your home or found out that its value has increased, you might be able to benefit from it – especially if you’re still paying or struggling to pay the mortgage.
A cash-out refinance helps you not only pay off the entire mortgage but also get access to additional funds that you could use for renovations or remodeling. It’s like taking a loan on top of another to pay off the first.
But how does it work exactly? And is it right for you? Let’s break it down.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new one, but with a twist. You can borrow more than what you currently owe on your home, and the difference is handed to you in cash.
Unlike simple refinancing, which just pays off your mortgage with another one, a cash-out refinance allows you some extra cash to use for emergency or important expenses. Your house is still on the line; you technically still have to pay the mortgage, but it comes with better terms than the previous.
These better terms might include:
- A lower interest rate
- More affordable monthly repayments
- More favorable loan terms
Just remember that you get this loan against your home equity, and it will increase your overall balance.
What Can You Use It for?
Besides paying off your current mortgage, you can take the extra cash and use it for:
- Home renovations or repairs. These can be costly, but ignoring them can affect more than just the aesthetics.
- Paying off high-interest credit cards. It’s not always possible or easy to pay off a loan at once to avoid accumulating more interest.
- Funding education. Whether it’s for your own college fee or your child’s education, a cash-out refinance might be better than a personal loan.
- Medical expenses. You can’t compromise on health, and credit cards can sometimes come with unfavorable terms.
- Starting a business. Cash-out refinancing is a popular option for having much lower interest rates than loans.
How Does It Work?
Here’s how the process for a cash-out refinance usually goes:
- Assess your equity. Most lenders, including AmeriSave, allow you to borrow up to 80% of your home’s value.
- Apply for the loan. You will have to go through a new underwriting process.
- Appraisal. Your home will need to be re-appraised to confirm its current market value.
- Close the loan. Pay off the old mortgage, get the cash, and start repaying the new loan.
Is It Right for You?
A cash-out refinance can be a powerful financial move when you use it with proper thinking and strategies. For instance, if you’re using the money to invest in your home’s value and boost it, it’s a good reason to apply for it.
But if you’re using the cash for impulse spending or temporary wants, it can actually put your home at risk. Not to mention that you will restart your mortgage payments, potentially adding years to your repayment.
With a cash-out refinance, you do get better terms like:
- Lower interest rates
- One single payment
- Potential tax deduction
So, if you have a good reason to apply for it, there’s no reason to hesitate.
Staff Writer; Harry Jacobs
