IS A CASH-OUT REFINANCE WORTH IT?

A cash-out mortgage refinance provides access to your home equity – liquidating one of the largest investments in your portfolio – your home.

When you take out a cash-out refinance, you borrow more money than you currently owe, and receive the difference between the new loan amount and your existing loan amount in cash. It’s a great way to consolidate debt, make home renovations, or have liquid reserves on hand.

But is a cash-out refinance worth it? Here’s how to tell.

The Benefits of a Cash-Out Refinance

Many people see a larger loan amount and think the cash-out refinance isn’t worth it because it increases your payment and possibly the total amount of  interest you pay over time. There are many benefits though.

Low Interest Rates

Secured loans receive lower interest rates because lenders have access to your collateral if you default. A cash-out refinance is a secured loan, giving you access to today’s extremely low mortgage interest rates. You may borrow up to 80% of your home’s value and keep the cash difference, paying less interest than a personal loan or credit card.

Use the Funds for any Purpose

You don’t have to specify why you need the funds for the cash-out refinance unless you have a high debt-to-income ratio and need to lower your DTI. In this case, you’d need to pay off your debts to get the cash.

If your DTI is in line with the requirements, though, you may use your home equity as you wish, whether for home renovations, credit card debt consolidation, or any other personal reason.

Take Advantage of Better Terms

When you refinance your first mortgage with a cash-out refinance, you can take advantage of any terms available. For example, if you have an adjustable-rate mortgage now, but want a fixed-rate loan, you can simultaneously change your term to a fixed term and take a larger loan amount for cash-out purposes.

Who Should use a Cash-Out Refinance?

Is the cash-out refinance for everyone?

No.

But many people benefit. First, ask yourself why you need the funds and if you could get them any other way. For example, if you only need $2,000 and you have a credit card with a 0% APR for 18 months, you may not need a cash-out refinance. You’d pay closing costs and interest on the amount borrowed when you could get away without paying any interest.

But, if you need a large amount of funds, a cash-out refinance is typically worth it because mortgage rates are at near all-time lows. If you can put the funds to good use and save money from borrowing the funds any other way, including a credit card or high-interest personal loan, it’s worth it.

Another great reason is to have money on hand for reserves. If you don’t have an emergency fund, you could find yourself in financial distress should you experience an emergency. Having your money tied up in your home doesn’t help when you need the money right away. Tapping into your equity with a cash-out refinance can give you the money you need.

What to Know

• Before you take out a cash-out refinance, here’s what you should know:
• You can borrow up to 80% of the home’s value minus any existing loans on the property
• You should use your home equity for ‘responsible’ reasons, not just to have money to spend
• Your home is the collateral so make sure you can afford the higher loan amount and payment without the risk of default
• You must be able to prove you qualify for the higher payment with your income and employment
• You’ll need good credit to qualify for a cash-out refinance

Bottom Line

A cash-out refinance is a great way to get your hands on the cash you need. If you’ve built up the equity in your home by making your mortgage payments and/or the home appreciation, you can use the funds to set you up for financial success.

There are several ways to tap into your home’s equity and we can help you choose which method works the best for you. A cash-out refinance is great for someone who doesn’t have a low-interest rate on their first mortgage and can benefit from refinancing it.

Talk to Us at Valley Mortgage

If you’ve decided it’s time to borrow against the equity you’ve built up in your current home, you have options. Give us the opportunity to discuss them with you. Our Valley Mortgage professionals are happy to walk you through your options and match you up with the perfect loan program. 

Contact us for a no-obligation conversation. Valley Mortgage is the largest independent mortgage lender in North Dakota and northern Minnesota. We’ve be helping folks like you for more than 38 years. If you haven’t reviewed our website, click here. Please call us at 701-461-8450 to get all the details about home mortgages and refinancing. There’s no cost, no obligation. Valley Mortgage does all the processing right here in our Fargo, ND office.