Typically cash-out refinances work when you have equity in your home AND you want to have cash to use for home improvements, school tuition, debt consolidation or a dream tucked away.
A cash-out refinance allows you to refinance your current mortgage and borrow additional cash. Based on the equity you have in your home, and the amount of cash desired, your new mortgage will be a combination of both. That is, what you owed on your previous mortgage, plus the amount of cash you take out, will then equal your new mortgage. This completely replaces your previous mortgage. Basically you will borrow more than you owe, and your lender will provide you with cash – usually in the form of a check or wire transfer into your bank account.
Compare Options
Often, you will pay a somewhat higher interest rate on a mortgage refinance when you take cash out. However, when interest rates are historically low as they are now, it’s usually a lower interest rate than a home equity loan or a credit card, for instance. At the same time, a home equity loan or a credit card might be an option that allows you to borrow money over a shorter term and therefore pay it off quicker. Whereas a cash-out refinance is rolled into a new mortgage with perhaps a longer term to pay off. That is why it is important to see your mortgage banker to help sort out your options and find the right program to meet your needs and budget.
Popular Reasons for Cash-Out Refinance
The top two most popular reasons people will do a cash-out refinance are because they want to do some major remodeling, or they want to consolidate debt. There are other reasons for a cash-out refinance as well like college tuition or a dream tucked away. Whatever the reason, you’ll want to get a good estimate of the cash you desire when you meet with a mortgage banker.
To make a cash-out refinance work for a remodel, you will want to explore your home improvement(s) and start getting some idea of how much cash you will need to complete the project(s). You might want to consider all the labor and materials for the entire project using a couple of projections for the highest and lowest bids you will consider.
To make a cash-out refinance work for a debt consolidation, you will want to gather all the debt you want to consolidate. Make a list of the terms of each debt including the interest rates, time to pay off the debt and current monthly payments. Your mortgage banker will help you determine your new consolidated monthly payment when you do a cash-out refinance to consolidate your debt. If you do consolidate debt, it’s extremely important that you are disciplined so you don’t incur additional debt.
Same with college tuition or that dream tucked away, you’ll want to research the amount of cash you need and are willing to roll into a new mortgage.
Cautionary Note
One thing to always consider when you do a cash-out refinance is that this cash – whatever you use it for – is now part of your new mortgage. A home mortgage is considered a secure loan, meaning your home is the collateral used to secure your mortgage. If you become unable to pay your mortgage, you could risk foreclosure and lose your home. Credit cards are unsecured loans and have no collateral. The most that can happen if you fail to pay is the lenders and creditors will try to collect and your credit will decline significantly.
Therefore, once you determine the amount of cash you want to remodel, consolidate debt, pay college tuition or to use for that dream tucked away, you can meet with your mortgage lender to determine how much cash you can take out with a cash-out refinance and safely stay within your budget.
Better to Buy New Home?
One final note – when you start to look at the remodeling you’d like to do because your kitchen is too small, you need more space or you’d like a bigger yard, maybe it’s time to consider a new home. With rates still at historical lows, it’s also a great time to purchase a new home. We can help you with your refinance or a new home purchase. Call us today to discuss all your options.
Talk to Your Mortgage Banker Today
Your mortgage bankers at Kalamazoo County State Bank are happy to review all of your options. They are experienced, local and can look at your financial picture to give you the options to fit your lifestyle, goals and budget. Call today at 269.679.5291 or visit online at https://kcsbank.com/mortgages/.
Kalamazoo County State Bank is an Equal Housing Lender.
