A house is more than just a place you live. A house is where you build your life, and as your life evolves and grows, so does your home’s value. While you build your life, you are likely also building equity, which is invaluable. A cash-out refinance mortgage can be a great way to tap into this equity when you need cash at hand. But many people ask the same question: Why would you do a cash-out refinance?
The equity you have worked hard to build in your home can provide you with capital when you need it most. And at mbanc, we have helped countless people tap into their home equity through cash-out refinancing to make their dreams a reality. Learn more about cash-out refinance loans in our blog:
What Is a Cash-Out Refinance Loan?
It’s important to understand this loan before answering the question, Why would you do a cash-out refinance?
Cash-out refinancing is, essentially, replacing your current home mortgage with another, bigger loan that enables you to access the difference in cash between your current loan and the new one you take out.
A cash-out refinance mortgage is similar to other refinancing products, like a closed-end second mortgage or home equity loan in that it is based on the equity you have built in your home. With this kind of financing, you are turning equity into cash.
Unlike a home equity loan or second closed-end mortgage, however, you are not taking out a second mortgage. You are replacing your current mortgage with a new one. This distinction is key to understanding this financial product.
With these loans, you can use the cash you receive for virtually any purpose, like remodeling your home, renovating it, consolidating high-interest debt, paying emergency medical expenses, or even paying for a wedding or dream vacation.
You can typically borrow up to 80% of your home’s value, though this rate hinges on your credit score, the type of mortgage, and the type of property itself. Cash-out refinancing replaces your current loan with a new one that often has a lower rate and shorter term.
Why Would You Do a Cash-Out Refinance?
People take out a cash-out refinance loan for several reasons. A common reason you might consider cash-out refinancing is reducing the interest rate on your current mortgage while receiving an infusion of funds you can put to good use and tax benefits.
Still, that’s just scratching the surface of the versatility of this financial product. Let’s look at some examples. Imagine Ferris is a homeowner with a current mortgage of $200,000, but their home is worth $500,000. In this case, Ferris has $300,000 in home equity.
In this situation, maybe Ferris wants to renovate and remodel their home (to build more home equity and realize a greater return on investment down the line), or they had an unforeseen medical emergency they need to pay for.
Alternatively, maybe Ferris wants to pay for school to receive a pay raise, or they want to pay for their wedding in their dream tropical destination. Regardless of the reason, this is an excellent resource at their disposal.
To be eligible for a cash-out refinance mortgage, Ferris has to maintain at least 20% of $500,000 in home equity, which is $100,000. So, in this situation, Ferris has $200,000 ($300,000 – $100,000 = $200,000) to cash out and use at their discretion.
With this kind of financial product, you can use home equity to build life equity.
Premier Lenders for Cash-Out Refinancing
So, why would you do a cash-out refinance? No simple answer exists to this question. Close your eyes, imagine a purchase or investment you’ve always dreamed of making, and that’s the answer. Cash-out refinancing is, simply put, a financial product that can provide you with the capital to make your dreams come true.