For many people, their home is the most significant investment they’ll make in their life. While real estate comprises a large amount of a family’s net worth, it is not a very liquid investment vehicle. The question then becomes how to tap into some equity in the home without selling the entire asset. The solution is: a cash-out refinance loan.
What is a Cash-Out Refinance Loan?
The name “cash-out refinance loan” describes precisely what this loan structure accomplishes. In a cash-out refinance loan, the borrower refinances their existing mortgage for more than they currently owe, taking out the difference in cash.
For instance, say you bought a house for $300,000, and through the down payment and monthly payments on the principal, you have $150,000 in equity in the home. You can use a cash-out refinance loan to refinance your mortgage for $200,000 and take the $50,000 of equity out in cash. Now, you have $50,000 cash and a $200,000 mortgage. You have essentially shifted money from your illiquid asset (the home) to your pocket.
You may be thinking, “doesn’t a home equity line of credit or second mortgage accomplish the same thing?” Well, yes and no. While a home equity line of credit (HELOC) and second mortgage also allow you to borrow against the equity in your home, a cash-out refinance loan actually pays off and replaces your current mortgage. This means that you maintain only one monthly payment.
One thing to note about cash-out refinance loans is that most lenders will require you to maintain 20% equity in the home you are refinancing. One exception here is for VA loans – veterans can refinance and cash out 100% of the equity in their homes. Additionally, since the loan we are talking about is a mortgage refi, you’ll need to pay closing costs (2-5% of the home’s appraised value).
Why Get Cash Out of My Home?
There are numerous reasons why someone would want to tap into their home’s equity. One common reason is to pay for home renovations. Using the equity in the home to finance home renovations often makes sense since those renovations typically raise the home’s value. However, the cash can also be used for other significant expenses such as paying off student loans, medical bills, or investments.
Some people don’t consider tapping their home’s equity for considerable expenses and instead put them on a credit card or other high-interest loan. A benefit of using a cash-out refinance loan is that the interest rate on mortgage loans can be significantly lower than others – especially in today’s record-low mortgage interest rate environment. This means that you can acquire cash at a lower long-term expense while refinancing your mortgage’s remainder for better terms.
- Jan. 2011: 4.76%
- Jan. 2021: 2.74%
*Rates from http://www.freddiemac.com/pmms/pmms30.html
How to Get a Cash-Out Refinance Loan
Getting a cash-out refinance loan only takes a few simple steps, and then you’ll be on your way to more available cash.
- Check your credit score – it should be above 620 to qualify with Park Place Finance
- Have at least 20% equity in your home
- Determine how much cash you need and what you’ll use it for
- Conduct an appraisal of your home
- Apply for a cash-out refinance loan through your lender
Want to get started with a lender that knows cash-out refinance loans well? Apply for one with Park Place Finance and we’ll ensure you have a fast closing window and a great rate.