If you have equity in your home, you may feel tempted to get a cash-out refinance. Before you decide to dip into your home like a savings account or a credit line, it’s important to understand what a cash-out refi is exactly.
Having equity means that you owe less than what your house is worth, or could sell for. That difference is what you have earned over the time you have owned the home. That difference is available to use should you want or need to use it. With cash-out refinancing you refinance your current mortgage to a larger one than what you owe, but less than its current market value.
So for example, if your home is worth $200,000 on the market and you currently owe $140,000, you could refinance your loan for $170,000 and take $30,000 to redo your kitchen or bathroom, fix outdated features or upgrade the landscape. These types of upgrades can add value should you decide to resell the home, or if you are in need of repairs to make your home safer or more livable.
Cash-out Refi vs. Home Equity Line
A home equity line is a separate loan from your original mortgage, where as a cash-out refi actually replaces your first mortgage. Home equity lines tend to have higher interest rates as well (this isn’t always the case, but it happens most of the time). Since you are actually closing one mortgage and opening another, you generally pay large closing costs with a cash-out refi. Closing cost aren’t customary for home equity loans.
When Cash-out Refinancing is a Good Idea
Typically it’s best to do a cash-out refi when you are looking to lower your interest rate or you have a clear goal in mind for the money you pull out of your home equity. You need to weigh the options and see how much you would save over time with the new loan.
In today’s market it’s much harder to do a cash-out refi with a conventional lender. That’s why so many homeowners with a good amount of equity in their homes turn to hard money lenders for help. Hard money lenders help facilitate loans that traditional lenders may turn away. This allows you to pull equity out from your home and use it to your discretion.
Make good decisions about how you plan to use the money. Think of it as a long-term investment. Do you want to fix up your home to improve its resale value? Are you adding a pool or need cash to buy the lot next door? These are all viable reasons to pull cash out of your home.
At Capital Fund 1, we can help you choose the right loan for the goal you have for your home and investment property. Smart decisions help you use your money to its full advantage for the future, whether you stay in your home or sell.