The family home is a consumer’s most valuable asset and many homeowners who are considering refinance have a myriad of solutions, allowing them to get the most from their real estate’s value.
When homeowners pursue mortgage refinance, they have to be approved for a new mortgage loan. There are two reasons why a homeowner would pursue refinancing: one is if rates are lower than what they’ve locked in on their current mortgage and the other is to pursue a new mortgage product (for example going from an ARM to a fixed rate mortgage or from a 15 year to a 30 year term).
Refinancing can produce positive outcomes for the borrower:
- If they lock-in at a lower rate, the monthly payment may be lower
- The borrower may want to adjust the term to accommodate his finances
- Build equity in your home quicker
- Pay off your mortgage sooner
- Tap into the home’s equity to finance home improvements, debt pay offs, college tuition etc.
Although traditional mortgage refinance may offer numerous money saving solutions, borrowers should consider different options to determine which refinance program is the best fit.
Borrowers who are interested in lowering their monthly payments, but also need additional cash for home improvements, debt consolidation or to pay for numerous other expenses could investigate cash-out refinance mortgages.
A cash-out refinance mortgage is when the borrower is approved for a loan greater than what he owes and uses the difference for personal use (like home improvements etc.).
For example, if the borrower owes $80,00 on a $150,000 home but needs cash to renovate the rumpus room, the borrower could refinance the mortgage for $100,000 and use the extra $20,000 for rumpus room updates.
How Do Cash-Out Mortgages Differ from Home Equity Loans?
While a cash-out refinance mortgage may look like a home equity loan it is quite different. Differences include:
- A cash-out refinance mortgage is one loan, whereas the home equity loan must be sought in addition to the mortgage
- Cash-out refinance is use to replace your current mortgage loan. Home equity loans are not mortgages
- Closing costs are involved with mortgage refinance, generally closing costs are not required for a home equity
When would it make more sense to pursue a home equity loan instead of cash-out refinance? If interest rates are higher than your original lock-in rate, it doesn’t make sense to go pursue refinance.
Another scenario is if you are several years into your mortgage term (for example, 20 years into a 30 year term) you may consider a home equity instead of cash-our refinance. Nancy Flint-Budde, Independent Certified Planner says, "If you are that far into a loan, then it might not make sense to refinance, even if your current rate is slightly higher."
How Can Cash-Out Refinance Mortgage Work For You
Before you start shopping for lenders, consider how much you would save each month and how you will use the additional money.
Determine if you are planning to use the money as an investment and for long term purposes or will it go towards something short term?
If you will be paying off your mortgage (and the additional cash gleaned from cash-out refinance) for 15 to 30 years you may want to consider using the surplus money for something that will add value to your home or life. For example, starting a new business, paying for college tuition or allocating dollars for a lifesaving operation not covered by insurance would be viable options.
However, if you need the dough for a family trip to Europe or shiny boat you’ve had your eye on, you may want to reconsider cash-out refinance. Remember--you are going to pay for this for a very long time.
Homeowners should also weight the pros and cons of cash-out refinance to pay down high interest rate credit card debt. Depending on your situation, you should determine if cash-out refinance is your best option or if a shorter-term loan simply “tightening your belt” is the best way.
Before you pursue a cash-out refinance mortgage, have a frank discussion with several lenders to determine which mortgage refinance program works best for you. Look for a lender that is honest and will work closely with you to arrive at the best loan scenario for you.