Unlock the Equity in Your Home: A Comprehensive Guide on Cash-out Refinancing and Traditional Refinancing
Two men.
Index:
1) Intro
2) What’s a cash-out refinance?
3) What’s a traditional refinance?
4) How’s the cash-out amount calculated.
5) Can we use both of these strategies?
6) Learn more!
Hello, World!
Cashout refinancing and refinancing are two popular options for homeowners looking to access the equity in their homes. In this article, we will explore the differences between cashout refinancing and refinancing, and the pros and cons of each option.
Hello, World!
What’s a cash-out refinance?
Cashout refinancing is a type of refinancing in which a homeowner takes out a new mortgage that is larger than the current mortgage. The difference between the new mortgage and the current mortgage is then given to the homeowner in cash. This cash can be used for any purpose, such as home renovations, debt consolidation, or even to purchase more rental property.
For example, if a property is worth $300,000 and the outstanding mortgage balance is $200,000, the homeowner has $100,000 in equity. A cash-out refinance of $250,000 would give the homeowner $50,000 in cash ($250,000 - $200,000) which they could use to purchase more rental property.
Here’s another example: A homeowner currently has a mortgage of $200,000 with an interest rate of 5%. The homeowner wants to access some of the equity in their home to pay off credit card debt and make some home improvements. They decide to do a cash-out refinance and take out a new mortgage of $225,000. The homeowner receives $25,000 (225,000-200,000) in cash after the closing costs and uses it to pay off credit card debt and make home improvements. so that they can increase the rent and make deductions on the improvements. However, the homeowner's monthly mortgage payment increases since they have taken on a larger mortgage and their interest rate remains the same.
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What’s a traditional refinance?
On the other hand, traditional refinancing is a process in which a homeowner takes out a new mortgage to replace the current mortgage. The main goal of refinancing is to get a lower interest rate, which can lower the monthly mortgage payment and save the homeowner money over the life of the loan.
A homeowner has a mortgage with an interest rate of 5% and a monthly payment of $1,200. Their home as appreciated in value and since the mortgage has also slowly been amortised or paid off, the equity has increased. The person goes to their broker and asks to lower their monthly payment and refinance their mortgage at a lower interest rate of 4%. They refinance their current mortgage for the same amount of $150,000 and in this scenario, the homeowner doesn't receive any cash but will have a lower interest rate and lower monthly payments. This is wonderful.
Another example might be: A homeowner currently has a mortgage of $200,000 with an interest rate of 5% over 20 years. The homeowner wants to lower their monthly mortgage payment and save money on interest over the life of the loan. They decide to do a traditional refinance and take out a new mortgage of $200,000 with an interest rate of 4% for the same 20 years. The homeowner's monthly mortgage payment decreases, but they do not receive any cash from the refinance.
One of the main advantages of cash-out refinancing is that it allows homeowners to access the equity in their homes and use it for any purpose. However, it also increases the amount of debt that the homeowner has and can lead to higher monthly mortgage payments. Additionally, cashout refinancing also increases the risk of foreclosure if the homeowner is unable to make the higher payments.
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How’s the cash-out amount calculated?
The lender will typically approve a cash-out refinance for up to 80% of the property's value, minus any outstanding mortgage balances. This means that if the property is worth $300,000, and the outstanding mortgage balance is $200,000, the homeowner could potentially be approved for a cash-out refinance of up to $80,000 (($300,000 -200,000) x 80%). However, the actual amount approved will depend on the homeowner's financial situation and the lender's underwriting guidelines.
On the other hand, traditional refinancing has the advantage of potentially lowering the monthly mortgage payment and saving the homeowner money over the life of the loan. However, it does not provide the homeowner with any additional cash.
Hello, World!
Can we use both of these strategies?
Yes.
You can first do a traditional refinance to get more favourable loan terms, and then do a cash-out refinance.
The investor will need to pay less on the new loan amount, which is great because sometimes people can’t afford the extra expense after a cash-out refinance.
This strategy would lower the person’s risk of defaulting and having their property foreclosed.
Hello, World!
It's important to consider that there are certain risks involved in both cash-out refinancing and refinancing, such as the risk of foreclosure, penalties for early repayment, and the potential loss of equity.
In conclusion, both cash-out refinancing and refinancing can be great options for homeowners looking to access the equity in their homes or investment properties. However, it's important to consider the pros and cons of each option, and to consult with a financial advisor or a mortgage professional to determine the best course of action for your specific situation.
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