Refinancing is a popular process in the real estate world. It enables a borrower to extend the terms of the mortgage to make it more favorable for them. In some cases, refinancing decreases your monthly mortgage payments or extends the loan term, but in some cases, it also allows you to potentially access cash, and that’s what cash-out refinancing is.
Let’s take a closer look at what cash-out refinance is and how a cash-out refinance lets borrowers benefit today and in the future.
What is Cash-Out Refinance?
A cash-out refinance enables you to replace an old mortgage with a new and larger amount than you previously owed and provides you access to some cash.
How Does Cash-Out Refinance Work?
A cash-out refinance works in the following way.
If you are a borrower, you will find a lender who is willing to work with you. The lender will first assess the terms of your previous loan along with the balance you need to pay on your previous loan. Moreover, the lender will also assess the borrower’s credit profile.
Once the assessment is complete, the lender makes an offer, and the borrower gets a new loan that allows the borrower to pay off the previous loan while getting access to a loan that is offered to the borrower as cash.
Standard Refinance vs. Cash-Out Refinance
A standard refinancing option involves changing the terms of the loan, interest rates, or the number of years you have to repay your loan. However, the borrower would never get any cash in hand with standard refinance. The incentive that borrowers get with standard refinance is a lower interest rate and a longer loan term.
On the other hand, a cash-out refinance can allow you to get access to finance as high as approximately 125% of your home’s value (or the value of your existing loan). This means that cash-out refinancing allows you access to enough funds to pay off your home’s value and get cash beyond, which can serve the same purpose as a personal loan.
Hence, a cash-out refinance allows you to access extra cash that you can use for any purpose, including home improvement, to consolidate existing debt, increase your cash savings, or pay for your child’s college fee. In all, you can use the excess cash for anything you want.
How Does a Cash-Out Refinance Help You as a Borrower?
A cash-out refinance can bring you several benefits as a borrower today and in the future. Let’s look at some of the benefits that you may enjoy when you opt for a cash-out refinance.
You Get Access to Funds That You Can Use for Major Expenses
As mentioned earlier, a cash-out refinance allows you to get a certain percentage of your property’s value, which means if you have equity in your home and pay 100% of your mortgage, you will still have cash value at your disposal and how you choose to spend that cash is up to you.
Whether you want to undertake a major home improvement project or increase your cash savings, you can do anything you want with the excess cash at your disposal.
Allows You to Consolidate Your Debt
With a median interest rate of 19.62% on your credit card, cash-out refinance makes a viable solution to consolidate your debt. With excess cash at your disposal, you can pay off your credit card bills or any other pre-existing loan and make a strong financial move to improve your credit score and your financials.
Enables You to Invest Cash in Your Property
If your property requires some major home improvement or renovation project, a cash-out refinance allows you to do so. With excess cash in hand, you can invest it in your property to improve your home’s outlook, which will benefit you both in the short and long run.
In the short run, you will improve the living conditions in your home. Moreover, you can expect a higher property value in the future, which will offer you returns whenever you want to sell your home.
Gives Access to Shorter Loan Term or Get a Lower Interest Rate
Through cash-out refinancing, you are taking a new loan, and the terms of this new loan can be different from your previous loan. Depending upon your financial situation, you may be able to get a shorter-term loan or opt for a lower interest payment over the life of your loan.
With ever-changing interest rates, a cash-out refinance is a viable option that will offer you returns today and in the future. So what are you waiting for? Opt for cash-out refinance today and enjoy the benefits today and for years to come.