What is a Cash Out Refinance
A cash out refinance lets you access your home equity by replacing your existing mortgage with a new one that has a higher loan amount than what you currently owe. When you close on your loan, you’ll get funds you can use for other purposes. If your home is worth $500,000 and you owe $300,000, you have $200,000 in equity. With cash out refinancing, you could receive a portion of this equity in cash. If you wanted to take out $60,000 in cash, this amount would be added to the principal of your new home loan. The principal on your new mortgage after the cash out refinance would now be $360,000.
A cash out refinance is a type of mortgage refinance that takes advantage of the equity you’ve built over time and gives you cash in exchange for taking on a larger mortgage. In other words, with a cash out refinance, you borrow more than you owe on your mortgage and pocket the difference.
What are the requirements
The requirements you need to qualify for a cash out refinance is based on your credit, finances, and property. This process is the same as buying a home, only this time, you already own the property. Requirements such as:
- Have more than 20% equity in your home
- A new appraisal to verify your home’s value
- A credit score of at least 620
- Debt to income ratio (including the new loan) of 43% or less
- Verification of your income and employment
Cash out refinancing vs. home equity loan
Cash out refinance and a home equity loan allow borrowers to tap into their home’s equity, but there are some major differences. Cash out refinancing involves taking out a new loan for a higher amount, paying off the existing one and obtaining the difference in cash. A home equity loan, in contrast, is a second mortgage that doesn’t replace your first mortgage and can sometimes have a higher interest rate compared to a cash out refinance.
Why should you consider cash out refinance?
There are many reasons why you should consider a cash out refinance. It can provide many financial benefits which are greater than taking a personal loan or a second mortgage. A personal loan is a shorter-term loan that provides funds for any purpose. Personal loan interest rates vary widely and can depend on your credit, but the money borrowed is typically repaid with a monthly payment, like a mortgage.
Here are some reasons why you should consider a Cash out Refinance:
· To fund home improvement projects
· Lower your interest rate
· To free up money for investments
· Pay of your debts
· Build college fund for your kids
· Boost your savings and retirement fund
· Pay off student loans