Cash-out refi can be a financial solution

Posted by on February 1st, 2019

Do you need money to pay off student loans, cover bills and expenses, or start a new business?

With homes prices skyrocketing across the nation the last few years, maybe you are one of the many homeowners who could tap your increased home equity for a significant sum through a cash-out refinance.

At Bay Equity Home Loans, our experienced loan officers can help you figure out if refinancing your current mortgage makes good financial sense.

Home equity is the difference between a home’s fair market value and the outstanding balance of all liens on the property.

It all comes down to how much your home is worth, your current mortgage balance and how much you want to borrow.

Say you paid $200,000 for your house. You’ve been in the home for a while and have paid the principal down to $150,000. Here’s the good part – with rising home prices, an appraisal shows the home is now worth $300,000. So, you’ve got $150,000 in equity.

With a cash-out refinance, lenders typically make loans for 70 to 80 percent of home value. Eighty percent of $300,000 home would be $240,000. With FHA cash-out refinance loans — that is, refi loans that are insured by the Federal Housing Administration — lenders can go as high as 85 percent. And VA-backed cash-out refinance loans are available for up to 100 percent.

But for our purposes, let’s stick with the conventional mortgage. Opt for that maximum loan amount, and the new $240,000 mortgage pays off your $150,000 balance, and you keep the $90,000 difference in cash. You can take out less depending on your needs.

Now, there’s no free lunch. For starters, as a new mortgage loan, your refinance is going to have new closing costs and fees, which can be rolled into the new loan, or can be deducted from the cash-out amount. With a cash-out refinance, you’ll pay closing costs similar to what you’d expect for a regular home sale, typically from 0.8 to 1.3 percent.

Secondly, your mortgage loan balance is now $240,000, not $150,000. But the interest rate on the new loan is in a mortgage loan range, not a credit card range – and that’s typically 10 to 20 percent lower annually.

In fact, one of the most common uses of a cash-out refinance is paying off any and all higher-interest debt – credit cards, promissory notes, or even student loans. Over time, that can be a huge advantage.

Tapping home equity, compared to other types of borrowing, can be the least-expensive way for someone to pay for a home improvement, pay off other debt, or invest in a business

A cash-out refi will require a home appraisal. Expect it to cost between $400 and $650.

Home equity is one of many tools to help you meet your financial goals, but it should be used thoughtfully and with discipline.

Everyone’s financial needs are different, but a refinance could be the right solution if you need a significant amount of money in one lump sum.