Cash-Out Refinancing Explained
Cash-out refinancing is a type of refinancing that increases the value of a homeowner’s mortgage in exchange for their receipt of a cash payment. It replaces your existing home loan with a new loan that is valued at more than you previously owed on your house. Why? Because you can receive the difference between what you previously owed on the house and the new value of your mortgage in cash. In addition to receiving cash in hand for your refinance, you can also secure a better interest rate or more preferable (longer or shorter) term lengths.
The team at Associates Home Loan of Florida, Inc., knows how important it is to have a friend in the mortgage business, and we’re here for you. Contact us if you live in Orlando, Tampa, Sarasota, or nearby Florida.
Lending Limits for Cash-Out Refinance
To be eligible for a cash-out refinance, you’ll need to have built at least 20% equity in your home. Typically, most lenders will only let you cash-out up to 80-90% of the value of that equity. So that means, if you have 20% equity built in a home worth $100,000, it’s valued at $20,000. In most cases, with good credit and financing, you can receive between $16,000 and $18,000. The more equity you have in your home, the more you can cash out.
In a conventional mortgage, if you borrow 80% or more of a home’s value in your mortgage, you’ll have to pay private mortgage insurance (PMI) until you’ve earned 20% equity. Likewise, in a cash-out refinance situation, you are required to pay PMI on your new mortgage until you have surpassed 20% equity yet again.
Uses for Cash-Out Refinance Payouts
Few people would say they wouldn’t benefit from some extra cash in their pockets. However, undertaking a cash-out refinance for this purpose should be taken very seriously. In some cases, you may be able to secure a lower interest rate than with your original mortgage, but you are still increasing the value of your loan. Some of the most common reasons we see for cash-out refinance include:
- To pay off high-interest credit card balances. This can help you save on interest (and in taxes, as mortgage payments are tax deductible) and may improve your credit score, as well.
- To fund home improvements, improve accessibility in your home, or install energy-efficient appliances.
- To make a down payment on a second home or vacation property.
- To enjoy a family vacation, pay for a wedding, or pay for college tuition
The Right Refinancing for the Every Situation
Cash-out refinancing isn’t right for everyone. If you aren’t in need of extra cash for a specific purpose, you may be better suited for a rate-and-term refinance. While cash-out refinance results in a higher mortgage, rate-and-term refinance by law must prove to save a client money over time through better rates or terms.
To learn more about cash-out refinancing, contact Associates Home Loan of Florida, Inc. Our mortgage professionals have the local expertise you want and the lending prowess of several national private lenders to offer the most competitive rates. If you live in Orlando, Tampa, or Sarasota, learn how we help our clients or schedule a consultation today!