Cash Out Refinance
What's a "Cash out Refi" or Cash Out Refinance?
Have you heard the commercials on the radio talking about a cash out refinance of your home? If you are a little blurry as to what it is, read on to find out more and see if you may can benefit from it.
What: A cash out refinance is where you take out a new larger mortgage than your existing home loan. Why would you do this you ask? Because you can “cash out” the equity or the difference between your new loan amount and what is owed. If you have a lot of equity in your home, this can mean a substantial amount of cash in your pocket.
Who: Basically anyone who has a substantial amount of equity in their property may be able to complete a cash out refinance. Deciding on if a cash out refinance is right for you can be tricky though.
Let’s look at some numbers to hopefully make it make sense. Let’s say you bought a house 5 years ago and the balance on your loan is currently $100,000. The real estate market where you live is similar to Summerville, SC and has boomed over the last year. Your house is now estimated to be worth $300,000. You’re interested in taking money out of your home’s equity to do some renovations.
Current Loan balance: $100,000
Market Value of house: $300,000
Equity: $300,000 – 100,000 = $200,000
New Loan Amount: Minimum of $240,000 (this is 20% of the home’s value which is typically a standard requirement of the lender)
Cash out Amount: $240,000 (new loan amount) - $100,000 (amount owed on previous loan) = $140,000 in your pocket
Yep, that right, you could pocket $140,000 (tax free), which sounds really nice, but remember your mortgage is now higher as you now owe more on your house. So while it may seem tempting to pocket this cash, remember a refinance such as this will increase your debt. Another disadvantage is lenders typically charge higher interest rates than your standard refinance rates for a cash out refinances and the homeowner is also responsible for closing costs of the loan (consider a Home Equity Line of Credit or HELOC if you want to avoid these closing costs).
Why: There are many reasons why homeowners may choose to complete a cash out refinance. Cash could be needed to fund repairs or renovations. Maybe there is other debt the homeowner would like to eliminate such as medical, student loans, credit card debt. You could get a better interest rate if the current rates are lower than your original rates. But this unfortunately works the opposite way as well if interest rates have risen since the original purchase of your home.
When: With conventional and VA loans, you must own your house for a minimum of 6 months before being eligible for a cash out refinance. If your current mortgage is an FHA loan, the waiting period is 12 months.
How: Contact your preferred mortgage lender to see if you qualify. Doing a cash out refinance is similar to taking out a regular mortgage. You’ll have to meet lender requirements such as credit score and income, go through underwriting, supply what seems like a never ending paper trail of work history, income, assets etc… If you do not have a preferred lender, Home Grown Real Estate has a list of great lenders that we have worked with in the past. We would be happy to share some suggestions if needed. And if you are like me who wants a personal experience with a big transaction like this, please DO NOT call the national company currently running adds on the radio. Choose a local lender who will answer your phone calls and even meet you in person.
Additional Cons: As stated before, you will now owe more on your home which mean higher debt. If for some reason, you can not make the payments, you will be at risk of a foreclosure (or be forced to sell). Your loan will have new terms which in many circumstances may not be favorable, such as higher interest rates or a longer term loan. Or if the housing market takes an unexpected downturn and the value of homes decreases by 20% (which is not expected anytime soon), you may end up underwater where you owe more than your home is worth.
So, to summarize, a cash out refinance is a way for homeowners who have considerable equity in their home to take cash out of that equity. While that my seem tempting to some, there are some disadvantages as outlined above. We at Home Grown Real Estate may be experts at helping clients buy and sell homes in South Carolina, but we are not financial or tax experts! As always, we recommend speaking with a licensed financial planner, mortgage broker, or tax professional to see if a cash out refinance is right for you. These professionals can help assess your goals, run the numbers, and give guidance on whether this would be the best option for you.
