If you need cash for home repairs, medical bills or to pay off debts, a cash-out refinance could help. This type of refinance allows you to tap your home equity and turn it into cash, which you can then use for virtually any purpose.
aren’t right for everyone, though. Here’s what you need to know if you’re considering one.
What is a cash-out refinance?
A cash-out refinance is just how it sounds: A mortgage refinance that lets you take cash out of your home.
A mortgage refinance may be a good idea if you’re planning to stay in your home for the next several years. If you’re looking to take cash out, fill out this quick survey to determine your next steps and potential future savings.
Here’s how it works:
Take out a new mortgage loan in a larger amount than your existing mortgage.
Use the new loan to pay off your old one, essentially replacing it.
After closing, you get the difference between those numbers (your old mortgage balance and your new one) in cash.
You can then use those funds for whatever expense you might be facing. Some homeowners use these to pay off high-interest debts. Mortgage loans tend to have lower interest rates than credit cards and other financial products (like personal loans), so this strategy can help save on long-term interest.
Before you refinance your mortgage, it’s a good idea to see what kind of interest rates you qualify for based on your financial situation.
How much cash can you get?
Most mortgage lenders let you take out up to 80% of your home’s value. So if your home is worth $500,000, you could potentially take out up to $400,000.
Remember part of that has to go toward paying off your old balance. So, to calculate the maximum amount of cash you can take out, you’ll need to subtract your existing mortgage balance first.
If you had a current balance of $225,000, for example, you’d be able to get up to $175,000 in that above scenario ($400,000 – $225,000).
Is a cash-out refinance a good idea?
The big advantage of cash-out refinancing is that you can access a lot of cash – and use those funds for any purpose. They also come with