Is a Cash-Out Refi Right for You?
As home values increase, more homeowners are considering a cash-out refi (refinance). First off, what is a cash out refi mortgage and is it a good idea to take one? While there are pros and cons to any mortgage loan, the more informed a homeowner is the better decision they can make. So let’s get down to it.
A cash-out refinance is when a homeowner takes out a larger loan than what they already have, and then keeps the difference. The cash-out refinance, also known as a cash-out refi, replaces the current mortgage and often at a lower rate.
Here’s why now is the best time for a Cash Out Refi Mortgage:
1. Put the brakes on your high-interest debt.
If you’ve got a lot of credit card debt, a cash out refi can help pay it off. It doesn’t end with credit card debt, though. A cash out refinance mortgage can help you pay off any high-APR debts such as:
- credit card debt
- student debt
- auto loans
- personal loans
By paying one lower interest rate mortgage rather than multiple high-interest debts and loans, you put more money back in your pocket every month. Consolidating debt to your mortgage loan can make paying that debt off easier and more affordable. A mortgage banker looks at the average weighted interest rate on your credit card debt to determine if a cash out refi would help.
Because a cash out refi can essentially lower the interest rate of the debt, you’re paying a lower rate for borrowing the same amount of money.
2. Large expenses don’t seem so large anymore.
Let’s say a homeowner wants to start a business, but doesn’t have the capital up front to do so. A cash out refi can provide enough money to get the business started. Other large expenses might be college tuition or medical costs. Because of the lower rates of a cash out refi, can skip the higher rates of credit cards or unsecured loans.
3. Low Rates & Rate stability.
Rates are at a historical low for 2017. A cash out refi offers a more stable rate for renovations on your home than a HELOC or home equity line of credit. Homeowners with HELOCs will pay a premium plus 2-3 percentage points, which isn’t so bad if the money is there to pay it off before rates change. Because that’s not usually the case, cash out refis often win out over HELOCs.
How do I get a Cash Out Refi?
If you’re sure a cash out refi is the way to go, there are three factors a mortgage banker looks at.
The better these 3 items are, the more favorable your loan terms can be.
- Credit score – as always, the higher the credit score the better the refi-rate. A credit score of 700+ offers lower rates and more wiggle room with terms.
- Appraisal – A high appraisal on any home works well with a cash out refi, or any refi for that matter. If your home needs repairs, make them and be sure to point them out to the appraiser.
- Loan-to-Value Ratio – Cash out refis use a conservative loan-to-value ratio. By using the formula: mortgage amount owed/appraisal value, you and your mortgage banker can easily determine your loan-to-value ratio.
Here’s how to get the best rate:
You don’t have to pay Big Bank fees to get a cash out refi. While commonly-known lenders may draw you in because of their TV ads, they can’t actually get you any special deals and typically charge very high rates and fees.
Instead, local lenders like Market Place Mortgage Corp. have more competitive rates and lower fees than Big Banks and Mortgage Chain Companies. Using a local lender means you get to keep more of the cash that you take out and put it towards your needs.