You have several options if you want to borrow against your home equity. A cash out refinancing is one option. This is when you pay off the previous loan(s) on your house, take out a new one, and receive cash for some of the equity you have.
How does a cash out refinance work?
- Refinancing a mortgage entails swapping out your current loan for a new one with a different interest rate and term.
- A cash out refinance is a sort of mortgage refinance that allows you to take a lump sum of cash from your home’s equity. The amount of equity you take out is then applied to the principle of your new mortgage.
- Depending on the type of loan you choose, the interest rate you pay is added to your new mortgage and may be fixed or adjustable.
- You repay the loan with monthly principal and interest payments throughout the life of the new mortgage.
How much equity is needed for a cash out refinance?
The amount you can withdraw is determined by your equity, and in most situations, you’ll need to keep at least 20% of the new loan’s value in equity following the refinance. The appraised value of your house is a big deciding element in how much money you can get.
Is cash out refinancing worth it?
A cash-out refinance has several advantages. However, you must weigh the costs of replacing your mortgage and paying closing charges against the advantages of using the money in the way you want. Consider whether the ideas you have in mind are worth the risk before you leverage equity in your property.
Key considerations for a cash-out refinance
If you have equity in your home, a cash-out refinance can make sense. However, there are also reasons to avoid it.
With a cash-out refinance, you can use the money for any purpose, like debt consolidation, home improvements or to pay for higher education.
Your new loan could have a lower interest rate, depending on when you took out your existing mortgage, current interest rates and your credit history. With a cash-out refinance, your rate will also generally be lower than credit card interest rates or the rates on a personal loan.
Just like with any mortgage or refinance, you’ll pay closing costs for a cash-out refinance, which could include fees for appraisals and credit reports.
With a cash-out refinance, you’re replacing your existing loan with a new one for a higher amount, which could lengthen the time you’re paying it back, and the amount of interest you pay over time.
As with any home equity option, a cash-out refinance uses your home as collateral, so a failure to make your loan payments could put you at risk of foreclosure.
Comparing the loans
You can borrow against your home equity in a variety of ways. A home equity loan or line of credit may be more beneficial than a cash-out refinance, depending on your scenario. Here’s how the various alternatives compare.