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Your home is a valuable asset and a great way to build wealth. When you have a big expense on the horizon, but money is tight, a cash-out refinance might be something to consider. Let’s take a look at how this kind of home loan works and how to determine if it’s the right idea for you.
In a cash-out refinance, you get a new mortgage that replaces your existing one and you get access to cash. Here’s how it works: Every payment you make toward your mortgage over the years builds equity as the value of your home increases. When you choose a cash-out refinance, you’re essentially cashing in on that equity you’ve built.
With mortgage rates still at all-time lows, utilizing your equity without selling your home can be a smart way to pay for large expenses. College tuition, a new pool or renovation, or major home repairs can be expensive to finance, but these are all examples of great investments that may be well worth the expense over the long term. Another popular option is to choose a cash-out refinance to consolidate your credit card debt, allowing you to stop paying high credit card interest rates for a much lower home loan rate. Financed over a 20- or 30-year term, a cash-out refinance would allow an affordable payment and hopefully leave your savings untouched.
How much cash you can take out with your new mortgage depends on the value of your home, how much you owe on your existing mortgage, and how much equity your lender requires you to keep. For example, let’s say your house appraises for $250,000. The lender allows you to borrow 80% of that value, which means you can borrow up to $200,000. If you owe $100,000 on your current mortgage, there’s $100,000 remaining that you can take out as cash.
But don’t forget the expenses that come with any mortgage, such as closing costs.1 Typically, these items are financed into your new mortgage, so you should figure in those costs before determining how much cash you can take. Keep in mind that you need not take all the cash that you’re eligible to withdraw! If you don’t need it, leave it, so you’ll have more equity and less debt.
Not sure if a cash-out refinance is right for you? Ask yourself these questions:
If you can improve the interest rate on your home mortgage, and you plan to use the cash in ways that improve your financial future, then a cash-out refinance can be an option worth considering.
1Some states also require private mortgage insurance. Cash-out refinance laws vary state by state. If you are considering this option in another state, check with a local credit union. UFCU’s lending area includes Texas properties only.
2UFCU does not provide tax or legal advice. For such guidance, please consult a qualified tax and/or legal advisor.
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