When you are considering a home loan refinance, it’s important to understand all of your options. One option that may be available to you is a cash-out refinance. This type of refinancing allows you to borrow more money than what you currently owe on your mortgage.
Keep reading to find out what you need to know about cash-out refinancing, including how it works, the benefits and drawbacks, and who is eligible.
What is a cash-out refinance?
A cash-out refinance is a new mortgage loan that pays off your old mortgage and gives you extra cash to use however you want.
The amount of money you can borrow depends on the equity you have in your home. Equity is the difference between what your home is worth and how much money you still owe on your mortgage.
- For example, let’s say your home is worth $250,000 and you owe $200,000 on your mortgage. This means you have $50,000 in equity.
- If you get a cash-out refinance loan for $225,000, this means you will pay off your old mortgage and have an extra $25,000 to use as you wish.
How does a cash-out refinance work?
A cash-out refinance works by replacing your existing mortgage loan with a new one that has a higher loan amount than what you currently owe. This difference is given to you in cash (hence the name “cash-out” refinance) so that you can use it however you want.
In order to receive a cash-out refinance loan, you will need to have equity in your home. The more equity you have, the more money you can borrow with a cash-out refinance.
One thing to keep in mind is that a cash-out refinance typically has a higher interest rate than a traditional refinancing loan.
- This is because lenders see it as a greater risk since you are borrowing more money than what you currently owe.
- However, even with a higher interest rate, a cash-out refinance may still save you money in the long run if you use the extra cash wisely.
What is the minimum credit score for a cash-out refinance?
However, it is generally around 700.
Keep in mind that the higher your credit score, the better interest rate you will likely qualify for. The minimum credit score for a cash-out refinance depends on the lender you are working with.
Do you pay taxes on cash-out refinance?
No, you do not have to pay taxes on a cash-out refinance loan. The money you receive from your loan is considered tax-free income.
Advantages and Disadvantages of Cash-Out Refinance
Now that we’ve answered some of the most common questions about cash-out refinancing, let’s take a look at some of the pros and cons.
- One of the biggest benefits of a cash-out refinance is that you can use the extra cash however you want. This can be helpful if you need money for home improvements, debt consolidation, or anything else.
- Another benefit of a cash-out refinance is that it allows you to lock in a lower interest rate than what you currently have. This can save you a significant amount of money over the life of your loan.
- Lastly, a cash-out refinance can be used to pay off your mortgage early. This will save you even more money in interest payments over time.
- As we mentioned before, one downside of a cash-out refinance is that it typically has a higher interest rate than other types of refinancing loans. This means you will end up paying more money in interest over the life of your loan.
- Another downside is that a cash-out refinance can put your home at risk if you are not able to make the payments on your loan. This is why it’s important to make sure you only borrow what you can afford to pay back.
- Lastly, a cash-out refinance requires an appraisal of your home’s value. This means you will have to pay for an appraisal out of pocket, which can be costly.
Now that we’ve discussed everything you need to know about cash-out refinancing, let’s take a look at who is eligible.
How to Qualify for Cash-Out Refinance
In order to qualify for a cash-out refinance, you will need to have equity in your home. The amount of equity you have will determine how much money you can borrow.
In addition, you will need to have a good credit score and a steady income in order to qualify for a cash-out refinance loan.
If you are self-employed or have a lot of debt, you may find it more difficult to qualify.
If you think a cash-out refinance is right for you, talk to Lending Warehouse about what options are available. We will guide you through the process and make sure you get the best loan possible. Thanks for reading!