Over the past couple of years, house prices across the country have increased dramatically. Some homeowners who took out a mortgage years ago could find themselves in a situation where they now have thousands of dollars of additional equity in their home.
What is a Cash-Out Refinance?
Home equity is the current market value, minus any liens, such as a mortgage. A cash out refinance allows clients to tap into that equity and turn it into cash. Cash-out refinances can have many benefits, including consolidating debt. If a borrower has a lot of high interest debt, they can use a cash out refinance to pay it off. Now, instead of paying a high interest rate on their past debt, they pay a much lower rate with a residential mortgage. This can save a great deal of money in the long run.
A cash out refinance can also be used for other expenses. Instead of using a credit card that has a high interest rate, borrowers can use a cash out refinance for home repairs or renovations, like building a swimming pool, updating the kitchen, or putting a fence around their backyard. The options of what you can do with the cash from a cash out refinance loan are endless.
How Much Cash Can I Get?
A common question that many clients have is, “How much money can I get if I do a cash out refinance?” The answer varies depending on the amount of equity you have in your house.
In most scenarios, we recommend that you not borrow more than 80% of your home’s value. If you go above that amount, you will have to pay Mortgage Insurance. Mortgage insurance is an additional loan cost that you will have to pay monthly.
Below are some common scenarios that demonstrate how a cash out refinance could help you:
Scenario 1: John Doe purchased a house 2 years ago for $200,000. He took out a mortgage for $160,000 and put $40,000 down for a down payment. Over the past 2 years, the value of his house has grown and it is now valued at $250,000. Unfortunately, John has accrued $45,000 in high interest credit card debt and wants to eliminate it. John called Mortgage Warehouse and his loan originator advised him to consider a cash out refinance. With the cash out refinance, John can increase his loan amount to get $45,000 to payoff his credit card balances.
John is now paying significantly less interest overall. It is not unusual for homeowners to save over $500 a month with a cash out refinance to consolidate credit card debt.
Scenario 2: Jane Doe purchased a house 1 year ago for $300,000. She took out a mortgage for $270,000 and pays Mortgage Insurance because she has less than 20% equity in her house. Over the past year her house has appreciated to $350,000. She wants to put a fence around her backyard because her family recently got a dog. Jane got a quote for the fence and it is going to cost her $10,000.
In Jane’s Scenario, her cash out refinance has two benefits:
- She will get the cash she needs to build the fence.
- Because her home has increased in value compared to her purchase price, her new loan will not have mortgage insurance
These are two great examples of how a cash out refinance could be a good move financially. If you are interested in doing cash out refinance to take advantage of the increased equity in your home, please get in touch with one of our mortgage loan originators today.