Everyone likes a little extra cash, but many homeowners don’t realize that they can actually use the equity they’ve put into their existing mortgage and turn that equity into cash for major improvements or for other home-related renovations. For homeowners who have significant equity in their homes, this can result in quite a bit of money to put towards much-needed repairs, remodels, etc.
Cash-out refinances are an increasingly popular way for homeowners to make some of their dreams truly come to, but what is a cash-out refi and what does it mean to you as a homeowner? Today, we’ll look at when you should consider a cash-out refinance.
What is a Cash-Out Refi?
A cash-out refinance is a mortgage instrument where homeowners take out a larger loan relative to their current equity in their home, and essentially get the difference paid out in cash. Granted, you’ll need to not only have 20% equity already in your existing loan, but most cash-out refis require that you have 10-20% equity after the cash-out.
In other words, the more equity you have in your existing loan, the more you can pull out in cash in this refinancing scenario. Cash-out refinances can be used for home improvements or to pay down other debt obligations or for personal uses–you don’t necessarily have to use your cash for home-only finances. It’s your money, use it how you see fit, but understand that you’ll still pay interest on any cash you take out.
Pay for Home Improvements
Now that we’ve got the what out of the way, let’s get into the why and when you should use a cash-out refinance.
First and foremost, many homeowners will use cash-out refis for home improvements. Granted, by the time a homeowner is ready and able to use cash-out, your home may be due for some much-needed updates. Home improvements may be the #1 use of cash-out refinances, but you can also use those funds for appliance upgrades, updating your HVAC system, etc.
There are no hard and fast rules for just how exactly you use your cash-out for home improvements and different homeowners have different needs, but no matter what yours are, you can use a cash-out refinance for what fits your family and your home.
Pay for College
As we’ve already said, cash-out refinances don’t necessarily need to be used for home improvements or remodels. Some homeowners actually will use their equity to pay for college for their college-aged students. With housing prices on the increase, there’s a good chance that you can get more than enough money from a cash-out to fund a college education.
Another reason to use your cash-out for college is that, in most cases, the interest rate you pay on your new mortgage will be far less than borrowing from the Federal Government. Although interest rates on student loans have come down over time, with mortgage rates at all-time lows, it stands to reason that using cash-out at low interest is a prudent decision.
Debt Consolidation
Finally, consider using a cash-out refinance to pay off other debts.
If you have high-interest loans, credit cards, or other debt obligations, then using a cash-out refinance to pay off those balances while getting a much better interest rate could be a great way to use your equity.
In most cases, credit cards can have astronomical interest rates as can old student loans and other less-than-desirable debt obligations. Therefore, you can not only pay off high-interest loans but you can pay off that cash-out at a much lower interest rate.
If you would like to learn more or are considering a cash-out refinance, reach out to the loan experts at Tidewater Mortgage Services, Inc. today!
