Are finances stressing you out?
About 1 in 8 Americans carry the burden of student debt. Along with repaying student loans, households also find themselves facing medical expenses, car payments, and more.
If you’re struggling to make ends meet, a cash-out mortgage could be the perfect solution. To help you decide, we created this short guide all about home refinancing options.
Read on to learn the pros and cons of refinancing for Cash.
Table of Contents
Equity in Your Home
For starters, your home can gain equity in one of two ways. First, your home can increase in value. Second, you can pay off enough of your mortgage principal to gain more equity.
A Cash-out will give you an opportunity to use your home’s equity. You’ll be taking out a Cash-Out Mortgage and getting money in return.
Second Mortgage vs. Cash-out Refinance
Is a cash-out refinance the same thing as a second mortgage? Not quite.
When you take out a second mortgage, you have to make an additional payment. Whereas, the cash-out refinance doesn’t add any more payments to your monthly bills.
Instead, you would be paying off your old mortgage and replacing it with the brand new one. One of the advantages of cashing Out is that you can take a portion of your home’s equity and apply it to your new mortgage. You’ll instantly have a head start instead of starting from square one.
Spending Rules and Restrictions
Are there any rules on how you can spend your Cash? Not at all! When you choose to refinance your home, the money you get is completely yours. You can use the money to repay student loans, help pay for a new car, repair your home, or anything else. After all, the funds are only there because you had equity in your home.
That means you’ve earned this money, and it’s up to you where it goes. To make things even better, you might qualify for special interest rates. While financing options like credit cards tend to have high-interest rates, Cash-out refinances are usually more favorable.
Consolidating Debt for Financial Security
Are you trying to dig your way out of an avalanche of debt? Then going forward with Cash out home, refinancing options could be the best choice. You can instantly use the money to help pay off high-interest debts. In the long run, you could wind up saving hundreds and even thousands of dollars in interest.
You’ll also be giving yourself an opportunity to repair your credit. Pay off those pesky credit cards in full, and watch your credit scores skyrocket! Whenever you take steps towards reducing your credit use ratio versus the amount of available credit you have, your financial standing improves.
Costly Private Mortgage Insurance
Next on our list of financial tips, let’s talk about private mortgage insurance. If you wind up borrowing over 80% of your home’s total value, you’ll have to purchase private mortgage insurance. For instance, let’s say you’ve home had a value of $100,000. If you refinanced for $80,000, or more, you’d have to get private mortgage insurance. Private mortgage insurance typically has high premium rates because the insurance company is taking on a large risk. You could expect to pay anywhere from $1,000 or more a year, just for basic coverage. To avoid an extra bill, we suggest limiting your refinancing ratio. Avoid borrowing over 80% of your total home’s value, and you should be just fine.
Mortgage Rate Factors
Moving on, you want to take your time exploring the top home refinancing options. However, don’t fall into the trap of fixating on the mortgage rate. When you only focus on the interest rate, you’ll overlook the other advantages each mortgage lender has to offer. There’s a lot of different factors that go into calculating the mortgage price. If a lender offers you attempting low refinance rate, there might be a reason. Sometimes pain a little bit more for the refinancing rate can mean you avoid certain fees and limitations. Next, take into account that closing costs are going to vary from one lender to the next. A low rate could simply be a ploy to distract you from high fees. Next, you want to time you’re refinancing wisely. When interest rates are favorable, you may be tempted to keep a close eye on daily refinancing rates. However, you shouldn’t try to time your refinancing on the rates of the loan. Instead, refinancing is something you should base on your own personal financial standing. If you’ve saved enough and have reviewed all of the good faith estimates, you can feel confident moving forward.
Did You Save Enough To Refinance?
It’s not always a good idea to opt for a cash-out refinance. For instance, a Cash Out Mortgage won’t be beneficial if you haven’t saved enough inequity. Take a moment to calculate exactly how much money you’d like to get from the Cash out refinance. For instance, if you’re taking out a loan to help rebuild your kitchen, come up with a reasonable estimate.
Once you know exactly how much money you need, you can decide if a cash-out refinance will help or hurt your cause. If you’re not sure how much money you need for renovations, reach out to contractors to get estimates. If your goal is to consolidate debt, reach out to the financial expert for advice. Firm up the number you need, and you’re lending options will become more clear.
Avoid Prepayment Penalties
Last but not least, double-check for prepayment penalties. Not all mortgages have them, but some do. In certain situations, when you pay the mortgage off ahead of schedule, a penalty is attached. Since cash-out refinances are technically a way of paying off your mortgage early, you could wind up with the refinancing penalty.
If your mortgage does have a prepayment penalty, don’t worry. The restriction typically only lasts for 3 to 5 years. If you’ve already on your home pass the five-year mark, you should be good to go. Double-check with a trustworthy lender before making any final decisions.
Exploring Home Refinancing Options
Understanding the ins and outs of cash-out mortgages helps you where your options are. Do you have enough equity in your home to make refinancing favorable? Are there any prepayment penalties that you’ll have to deal with?
Finally, never rush exploring home refinancing options. Jumping at an opportunity because it seems perfect is often dangerous. Instead, we suggest reaching out to several lenders to get a variety of options.
Before you know it, you can have the cash you want in hand! For more tips like these, see what the rest of our website is all about.