Last Updated on October 29, 2021 by Maggie Sutton
Did you know that you can utilize the equity in your home to finance essential items like home renovations, repairs, or even college tuition? Indeed, it’s possible to refinance your home at a lower interest rate while tapping into the equity for a chunk of cash through a cash-out refinance. With home equity at record highs, you might be sitting on more cash than you think. Learn about cash-out refinances and how you can use this financial tool to pay for significant investments.
What is a Cash-Out Refinance?
With this refinancing option, the borrower takes out a new mortgage for more than the original mortgage and pockets the difference between the loan amounts. For example, if your house is worth $200,000 and you owe $80,000 on your mortgage, you could refinance for $120,000 and receive the difference in a cash payout.
Your home is an investment, and it can make financial sense to utilize some of your equity to access cash for a significant expenditure.
Some of the primary benefits of a cash-out refinance include:
- Lower interest rate – It’s possible that the new interest rate could be small enough that your monthly payment on the more massive home loan isn’t much different than your previous payment amount.
- Fixed interest rate – Unlike typical lines of credit, such as a home renovation loan, you can get a fixed rate home loan. The fixed rate loan gives you peace of mind while also providing you with an understanding of your future baseline expenses so that it’s easier to create long-term financial plans.
- Cash – The most important benefit of this kind of home loan refinancing is that it gives you money that you can spend on essential expenditures such as home renovations, college tuition, and paying off high-interest debt.
- Improve Your Credit Score – Your credit score will likely improve if you use the money to pay off the balances on credit cards and other outstanding debt.
There are some risks to consider before tapping into your home equity though. Experts suggest that you carefully weigh the following factors before touching your current equity:
- You could end up underwater if home values decline in your area. A drop in home values in your area could be a problem because, if you need to sell your house and it sells for less than the amount of your mortgage, you must write a check for the difference.
- It costs money to refinance. The loan costs can run into thousands of dollars. (However, Homes for Heroes can save you money here by refinancing with one of our lending affiliates.)
- The mortgage clock starts again so that you’re back at the beginning with a 15 or 30-year mortgage.
Pick a Lender
Did you know that lending costs vary by the lender? You can take advantage of low-interest rates and discounted loan fees by working with a loan specialist who is affiliated with Homes for Heroes to refinance your home. Homes for Heroes works with experienced loan specialists in communities throughout the United States to help bring you terrific home loan options and discounted loan fees.
SIGN UP, and Homes for Heroes will connect you to an expert loan specialist in your community who is eager to assist you with all of your home financing needs.
Successful Cash-Out Refinance
Prepare yourself for the refinancing process by understanding the critical factors that determine whether you’ll be able to perform a cash-out refinance successfully. Let’s take a look at some of the most significant hurdles that you’ll need to overcome along this financial journey.
You probably remember the importance of your credit score from when you got your first mortgage. This number plays a prominent role in determining if you qualify for new financing and the details of the fresh loan. Lenders prefer borrowers who present credit scores higher than 700 for conventional home loans. Buyers with lower credit scores may still qualify for a loan but may need to pay a higher interest rate on their mortgage.
FHA and VA loans present exciting financing opportunities for many Heroes due to less stringent lending guidelines. There isn’t a set credit score for these loans, but most lenders prefer borrowers with a credit score of at least 600.
How much is your home worth? The appraised value of your home is vital to obtaining your new loan because lenders will only allow you to finance a specific percentage of the current value of your home.
With conventional loans, you can get a new mortgage for 70-80% of property’s current value. Buyers can borrow up to 85% with FHA financing, and individuals who are eligible for a VA loan can finance up to 100% of the appraised value of the home.
Your lender will hire a licensed home appraiser to determine the current value of your house. Although the complexity of the appraisal will vary depending on the type of loan, with VA loans requiring multiple inspections, for example, you can take affirmative steps to make sure that your home makes an impressive impression on the appraiser.
Here are a few simple tips to make the home appraiser see the value in your home:
- Clean and declutter the inside and outside of the house
- Make sure that the heating, air conditioning, electrical, and plumbing systems work
- Repair any roof issues
- Replace broken appliances
- Provide maintenance history and proof of permitted remodeling
- Gather information on current sales of similar homes in your neighborhood
- Inform the appraiser of anything that might raise the value of property in your area soon
Lastly, a cash-out refinance is an outstanding way to make the equity in your home help you achieve your financial goals. This type of lending option lets you reap the benefits of low, fixed interest rates with access to cash. SIGN UP to discuss your loan options with a Homes for Heroes affiliate loan specialist today.