If you have equity in your home, you may feel tempted to do what your neighbor did or your co-worker was talking about doing the other week: 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.
If you have equity in your home –meaning it’s worth more than what you own– then with cash-out refinancing you refinance your current mortgage to a larger one than what you own. The extra cash you pull out goes straight into your pocket.
So, if you owe $40,000 on your home that is worth $100,000 on the market, you can refinance your loan into a $60,000 loan an use the $20,000 to enhance your landscape or send your kid to college (his first two years anyway).
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.
Just be caution of 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 it’s resale value? Are you adding a pool or needed cash to buy the lot nextdoor? These are all viable reasons to pull cash out of your home.
But if your daughter is getting married and wants a $25,000 wedding, or you want to fly the whole family to Paris for a reunion… you might want to reconsider your investment. You don’t want to spend gobs of money or years of your life paying back interest and then some on your daughter’s storybook wedding.