A cash-out refinance is the best option for anyone looking for cash on hand or to consolidate debt. The best thing to do with this type of refinance is have a drawn out plan with what you are looking to accomplish with this refinance. Speak to your loan officer about it because planning is essential with these options.
Paying Off Debt and Debt Consolidation
You can use the funds, from a cash-out refinance, to pay off high-interest debts like credit cards. However, while you enjoy a lower interest rate on your mortgage, your monthly payment might go up in the process. A cash-out refinance, also known as a debt consolidation refinance, is the process of securing a mortgage for more than you owe on your home and then you take the difference in cash. Before doing this kind of refinance you will need to identify how much you need to cash out in order to pay off debts. After the calculation, you’ll want to make sure you won’t owe 80% of your home’s value after the refinance because if you do, you’ll need to buy mortgage insurance. So play it smart and think about your monthly mortgage payment, closing costs, and plan long-term.
Finish Your Basement
While it’s true that people refinance to pay off debt and large expenses, you can also get a cash-out refinance and use that money to pay for home renovation, like finishing your basement. One of the biggest advantages of refinancing is receiving that new and low rate. This will directly lower the cost of your entire loan which means more money in your pocket. It is good to note that every 10,000 taken out in cash-out equates to roughly 50 dollars additional onto your mortgage payment with a 30-year mortgage.
Add a Home Office
With the untimely pandemic that has affected all of our lives, home office spaces have become crucial. People may have worked from home before, but not like they do now. Most homeowners are realizing that one home office isn’t enough. This is especially true if you are in a two-person household where both people ended up working from home during this pandemic. To temporarily solve this issue, people began shifting extra closets into small pop-up office spaces. So, if you are in need of some at-home office space, but don’t have the funds, a cash-out refinance may work for your situation.
It may not come to mind but you can invest your cash-out money. For example, you may want some extra retirement money. It wouldn’t hurt to save that money for the future. Also, If you have children, you could use the extra cash to start or add to a college fund for your child. The possibilities are endless, but you want to make sure you are making sound decisions in regard to your investments. Be sure to talk about your options and make the best decision long term.
Cash-Out Refinance Requirements
Although requirements can vary slightly depending on the lender, these are the basic requirements you can expect.
- More than 20% equity in your home
- Debt-to-income (including the new loan) of 43% or less
- Loan-to-valueof 80% or less
- A credit score of at least 620
- Verification of your income and employment
- A new appraisal to verify your home’s value
You can get creative with how you choose to utilize the cash from this type of refinancing. However, you want to make sure you think strategically about your situation and consider all your options in order to maximize the benefits. Picking the best mortgage lending partner possible can make the difference.