Invested Interest: Understand Cash-Out Refinancing
Life is expensive. One of the most recent measures of inflation shows prices for just about anything we need or want went up by more than 5 percent over the past year—far higher than the estimated 2 percent figure economists say we should use as a guide for putting together a household budget. Uncertainty over rising prices can relegate even the most necessary purchase to the “to do later” list. But a solution may be as close as your front door.
Home values equal cash
The combination of low inventory and high demand continues to push home values higher, presenting homeowners with almost unprecedented opportunities to put their equity to work by taking cash out of their homes. One way to do that is through a cash-out refinance.
How does a cash-out refinance work?
Just as the name implies, a cash-out refi allows you to take cash out of your home through refinancing your mortgage. Actually, you’re getting a new and larger mortgage that pays off and replaces your current loan and allows you to cash out the difference. Here’s an example of how it works.
Let’s say your home is worth $400,000, and the current balance on your mortgage is $250,000. The maximum amount of a refi loan is typically 80 percent of the home’s value—$320,000 in this case, which would be the amount of your new loan. Then, if you subtract the $250,000 mortgage balance your refi pays off, the maximum cash-out from the equity you’ve built is $70,000.
When does a cash-out refi make sense?
A cash-out refinance can help pay for major home repairs or renovations like a new roof, HVAC system, or a kitchen and bath remodel. Using the cash from your refi will keep those expenses off your credit cards that have much higher interest rates. You can also use the cash to pay off high-interest debts or student loans, which may likely improve your credit score. In addition, your cash-out refi loan may have a lower interest rate than you’d typically get with a home equity line of credit (HELOC) or a home equity loan.
Cash-out refinances come with restrictions, limitations, and costs of their own. To protect against losses from a loan default, lenders limit the amount of equity you can withdraw. You’ll also have to pay closing costs, which can be higher for a cash-out loan than a traditional refi. And since this is a new mortgage. it comes with new terms, so extending the length of the loan means you could pay more interest long term.
A cash-out refinance may not work for every homeowner, but for many, it’s a great way to access cash they’ve earned through the appreciation of their home and put that money to work.
To learn more about AAA’s home loan program, including cash-out and traditional refinancing options, visit AAA.com/HomeLoans or speak with one of our loan professionals at 877-411-5822.