Essential Things You Should Know About Cash-Out Refinance

October 4, 2019

Refinancing your home loan means replacing your existing mortgage with a new one, but under different terms that are usually more advantageous to you as a borrower. If you intend to refinance, you can opt for rate-and-term refinancing which can lower your mortgage interest or shorten your payment term. But if you want to access money in the process, you may choose cash-out mortgage refinancing.

What is Cash-Out Refinance?

A cash out refinance allows you to obtain money by converting a part of your home’s value into cash. The new mortgage that will replace the original loan under this option will have a higher outstanding principal balance. The amount of money you can access will be the remaining amount when you deduct your current home value from your remaining loan balance.

For instance, if you took a home loan amounting to $200,000 and you already paid $100,000, you still have $100,000 worth of debt to pay. Given that you already paid half, it means that your home value is worth $100,000. If you want to access $50,000 of your home value under the cash out refinance scheme, your new home mortgage will be $150,000. The principal is composed of $100,000 for your remaining balance and the additional $50,000 that you can obtain in cash.

What You Should Know About Cash-Out Refinance

While the thought of converting your home value into cash can be exciting, you should know the following information first before you go for cash-out refinancing:

Purpose impacts cash-out

The reason you are opting for cash-out refinancing may affect the amount of money you can get. For instance, if you use the funds for substantial home improvement work, you may be given more money as the project will improve the value of your house. Using your cash to pay credit card debt can also be advantageous since it can increase your credit score.

Credit score matters

Even if you have an existing home loan, your credit score is still a significant factor in determining the rate of interest that will be used under the new mortgage term. As with other mortgages, you can only be approved for a cash-out refinancing scheme if you meet the minimum credit score permitted by the lender.

Lower interest rate

Cash-out refinancing is usually given at a lower interest rate compared to other home loans. Note, however, that the chances of lower interest rates depend primarily on the mortgage rate during the time you bought your home. You might be assigned a lower rate of interest if you bought the house when loan rates are much higher than today.

Risk of foreclosure

Considering that your home serves as collateral, there is always the risk of losing your house if you fail to pay. Given the risk of foreclosure, opting for conventional financing is better if you do not need immediate cash.

A cash-out refinancing will benefit you the most if you get a lower interest rate and the additional cash will be put to good use. Instead of taking uncalculated risks, you should rely on expert advice. Call EnTrust Funding today to learn more about the most suitable loan program to address your needs.