Reasons To Consider A Cash-Out Refinance
A cash-out refinance can provide a number of financial benefits, and may present advantages over taking out a personal loan or second mortgage.
Fund Home Improvements And Renovations
From questionable design choices to a broken HVAC system, upgrades are often necessary. A cash-out refinance allows you to use the equity you’ve already earned to fund home improvements.
Consolidate Debt
A cash-out refinance can give you the money you need to pay down your debts and transfer what you owe to one convenient, lower-interest payment.
Get A Lower Interest Rate
If you put an unexpected bill on a variable credit card, you might pay a high amount of interest – the prime rate that’s tied to the federal funds rate set by the Federal Reserve, plus a certain number of percentage points on top of that. Mortgage and refi rates are generally lower than credit card interest rates – often significantly lower. If you have enough equity in your home to cover your bill, you may save thousands in interest over time.
Free Up Money To Invest
When you take into account the power of compounding interest, it can be a smart move to free up money and save toward retirement early rather than keep your funds tied to your home. Cash-out refinances give you access to funds that you can use to boost your retirement savings or build up a college fund.
You might need to consider a few things before you commit to a cash-out refinance. Here are some important considerations to bear in mind.
You’ll (Probably) Have To Leave Equity In Your Home
Let’s say you’ve paid a total of $20,000 on your mortgage principal. You might assume this http://www.onedayloan.net/payday-loans-ca/ means you can take up to $20,000 out with a cash-out refinance. However, depending on your loan, this isn’t always possible. Conventional loans require you to leave 20% equity in your home after a refinance, and FHA loans require 20% as well. The only exception to this rule is with a VA loan refinance, which doesn’t require you to leave any equity after you refinance.
You’ll Pay Closing Costs
Just like when you buy a home, you’ll pay closing costs when you refinance. Some common costs to refinance for closing include credit report fees, appraisal fees and attorney fees, depending on your state. If you only need to take out a very small loan, you should take a look at whether the closing costs would negate anything you save with a lower interest rate. In cases like this, resources like Rocket Loans® can help you explore your options for personal loans.
You Won’t Get Cash Immediately
Similar to when you buy a home, you must submit to underwriting and appraisal processes before your lender approves your refinance. Even after you close, the Truth in Lending Act requires your lender to offer you 3 days to cancel the loan if you have a change of heart, and you won’t get your cash until 3 – 5 days after closing. If you need money immediately, a cash-out refinance may not be the right solution.
Your Loan Terms May Change
When you get a cash-out refinance, you pay off your original mortgage and replace it with a new loan. This means your new loan may take longer to pay off, your monthly payments may be different or your interest rate may change. Be sure to look at the Closing Disclosure from your lender and analyze your new loan terms.
You’ll Need An Appraisal
Cash-out refinances are contingent upon an appraisal by an independent third party. Appraisals can take time, so factor this into your refinancing timeline.