Sometimes, your financial situation changes, or your current mortgage arrangement no longer works for your needs. When that happens, you may consider asking your lender for a cash-out refinance.
Borrowers often use cash-out refinance loans to consolidate debt and complete necessary home repairs. Compared to other options, like a home equity loan or home equity line of credit (HELOC), a cash-out refinance results in one lien on the property instead of two.
But what exactly is a cash-out refinance, and how does it work? Read on to learn.
A cash-out refinance, put simply, is a type of refinanced mortgage that allows you to draw from your home equity in exchange for a larger loan balance. When you refinance your loan, you start over with a new mortgage that has different terms — like a different interest rate or longer loan lifespan.
In a cash-out refinance, you take out a new loan that’s higher than your original mortgage. The difference between the new loan balance and your old loan balance is the “cash-out” part of the agreement. You pocket the cash and use it for whatever you like.
The amount of money you get from a cash-out refinance depends on your home equity and debt to income. Home equity is the total percentage of the property you have paid off from the original mortgage.
To perform a cash-out refinance, lenders usually require you to have at least 20% equity in your home. However, this can vary depending on your lender or the type of loan. For instance, with a mortgage loan from the Department of Veterans Affairs, you could potentially borrow 100% of your home's equity through a VA cash-out refinance.
Generally speaking, you can borrow up to 80% of your home’s value with a cash-out refinance. To determine your equity, take into consideration that the new loan balance will not only include the requested cash-out but also the original loan balance and closing costs. This may impact the amount you are able to withdraw from the property.
For a lender to approve you for a cash-out refinance, you need to meet certain requirements, including:
A cash-out refinance does come with certain key benefits, such as:
However, a cash-out refinance also brings some potential downsides:
If a cash-out refinance works for you, you’ll end up with a new mortgage with different loan terms and a higher mortgage balance. However, it’s not the only way to escape a difficult mortgage situation.
Consider co-ownership with Balance. If you’re approved for our homeownership program, you’ll receive a cash investment from Balance in exchange for an ownership interest in the home. You remain on the title and continue to hold equity in your home. Unlike traditional monthly mortgage payments, your monthly payment to Balance covers occupancy plus your share of the insurance and taxes.
You can use the lump sum we give you to bring past due balances current and strengthen your overall financial profile — you can also pay off personal loans or make necessary home improvements. Because you have ongoing access to your equity, you can even submit a request to access additional cash if necessary to avoid missing payments or taking on high-interest debt.
Balance believes we can help you rebuild your credit and financial health — and create your path back to traditional homeownership. Working with Balance may be the best way to get out of a bad mortgage without compromising your other goals or your homeowner status.
If you’re having a tough time with your current mortgage, you aren’t alone. Many Americans are experiencing the same troubles after homebuying. Balance can help you just like we’ve helped them. Contact us today to get started!