If you have a mortgage on your home and you have already paid some installments or if your property’s value has increased, you probably have some equity on your home. This equity is an excellent source of inexpensive funds. But instead of using a home equity loan you can request a cash-out refinance loan.
The cash-out refinancing can be best understood by looking at an example. Suppose a homeowner has a home valued at $300,000 and they owe $200,000 on the mortgage. The equity on the home, therefore, stands at $100,000 (33% of the current property value). In a cash-out refinance, the homeowner refinanced not just the remaining $200,000 but also an additional amount of perhaps $50,000. The mortgage now stands at $250,000, and the amount of equity in the property has been reduced to $50,000. The homeowner now has a $50,000 line of credit to use for whatever they wish.
Benefits of cashing out your home’s equity
Requesting a cash-out refinance loan can provide you with additional benefits like a marked reduction on the rate of interest you pay for your current mortgage or a reduction on the loan installments you pay every month – both of which are excellent ways to instantly reduce your overall debt exposure. This can also increase your credit score because your income/debt ratio will improve too.
Incredibly cheap financing
The cash released through the cash-out refinance could be put to a number of uses. For example, you could use the cash to settle up with some other existing debt that has a higher rate of interest than the home mortgage. This way, you could save money in interest payments. This would be particularly useful in the consolidation of credit card debt where rates of interest are much higher. Using the money obtained from the cash-out refinance to pay down the debt could save hundreds or even thousands of dollars over the life of cards or other loans. The cash released could also be used to finance home improvements, such as kitchen modifications, that would increase the value of the property, often in excess of the money put in. This means that you can re-build your home’s equity in no time.
There are many other ways in which the released funds could be used, for example, college loans, major appliances, and so on. If the money from cash-out refinance is used for these purchases and expenses, then that much money can also be saved from potential interest charges if credit cards were to be used.
Lower debt exposure
By using a cash-out refinance, you can get lower interest rates, longer repayment tenures and therefore, small loan installments. This can certainly improve your credit stance even if your overall debt increases. This is due to the fact that even if you owe more money, your income will suffer less because your debt will be spread over a longer period and with lower interests.
The result of these variables is a considerably lower debt exposure and an improved income/spending ratio. No doubt, this will provide you with the ability to cope with new and larger loan installments much more effectively.
Keep in mind
Getting a cash-out to refinance is a smart way to pocket some of the equity. Keep in mind, however, that the money from a refinance is received at closing – as a lump sum amount. While you may be tempted to borrow up to your home’s equity, it is important to avoid borrowing too much. Because cash-out refinancing increases your previous mortgage principle, your monthly payments may also increase. So, prior to applying for a cash-out refinancing, make sure you can afford the additional expense to avoid the risk of foreclosure. Check rates today to see if cashing out is a benefit for you.
Prospect Financial Group
948 Garnet Avenue
San Diego, CA 92109
NMLS: 349089 | BRE: 01837707