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If you’ve built up equity on your home and you’d like some extra cash for renovations, debt consolidation, or whatever your heart desires, a cash-out refinance can be a great way to get the money you need.
With cash-out refinancing, you refinance your mortgage with a mortgage that is larger than the amount you still owe on the original mortgage and then you keep the difference. Cash-out refinancing differs from home equity loans in that you are actually taking out a new mortgage and not simply taking a loan off the equity you’ve built up on your property.
One thing to keep in mind with cash-out refinancing is that you will still need to collect all the documentation you would for a mortgage, including proof that you can keep up with the payments.
With a cash-out refinance , you can borrow over 100% of the equity on your house. For instance, let’s say you owe $150,000 on a $300,000 house. This means you have $150,000 of equity in your home. With a cash-out refinance you could borrow $200,000, replace your mortgage with the cash-out refinance, and have $50,000 left over to use as you see fit.
One of the main reasons that people pursue cash-out refinancing is to pay for home improvements with the extra money. This can boost the value of the house, and improve the equity even more. Other reasons for a cash-out refinance can simply be to use the money to pay off outstanding debts with high interest rates or to pay for college.
Many people confuse home equity loans and cash-out refinancing, because both deal with using your home equity to attain money from a lender.
With a home equity loan (HEL) you are using the equity of your property, or part of it, as collateral for a loan. These loans are often referred to as a “second mortgage,” and entail the lender making a one-off payment to the borrower, whose equity shrinks in relation to the size of the loan. As the owner repays the loan—and the relevant interest and fees—the equity begins to increase.
Because a home equity loan is secured by the property, they typically have lower interest rates than unsecured loans.
Unlike a HEL, a cash-out refinance entails securing a new mortgage to cover more than the preexisting mortgage so that you can get the difference as a loan. The HEL, on the other hand, is taken out in addition to your existing mortgage.
A cash-out refinance can get you a large sum of cash that you can use as you please. This can be to consolidate outstanding, high interest debts under a single loan with a friendlier interest rate, or to pay for a family emergency or home renovations—it's up to you.
Also, a cash-out refinance is usually easier to qualify for than other loans. You already own the property and have the collateral, so gaining approval shouldn't be too difficult.
Having said that, one con of cash-out refinances is that the process can be similar to attaining a standard mortgage, meaning you'll have to put together a wide range of documents relating to your taxes, salary, bank statements, and more. You may also face steep closing costs on the loan. In addition, if for some reason the value of your home—and thus your equity—take a hit, you could end up owing more than your house is worth down the road.
Which lender should you choose for a cash-out refinance? Here are some industry leaders.
It varies some by lender, but usually you can get a cash-out refinance loan if you have a credit rating of around 640, and in some cases somewhat lower. Because you are using your home as collateral on the loan, lenders tend to be more forgiving of less than stellar credit.
If you have built up significant equity in your home, then a cash-out refinance can be one of the easiest ways to attain funds that you can put to good use. Now that you know what a cash-out refinance entails, shop around with some of the industry leaders and find the one that works best for you.