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Cash out refinance: How it works and is it the right option for you?

A cash out allows you to access your home equity through a refinance. This process is very similar to a regular refinance, where you substitute one mortgage (your existing one) for another, except that the new one will be higher. The difference between the two mortgages, is given to you in cash, hence, cash out. The cash can be used for almost any goal, such as home improvement, debt consolidation, or other financial objectives.

How a cash out refinance works

A cash-out refinance is a form of mortgage refinancing in which you receive money in exchange for taking on a larger mortgage after investing the equity you’ve acquired over time. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and pocket the difference. There are no other loans against the property and you get to have just one monthly payment because it’s one mortgage only.

What can you do with your cash out?

Accessing equity from your home can be used for any needs that you may have. Whether you are looking to pay off other debt by consolidating, invest, home improvements or for large purchases that you don’t want to put in credit cards or take out other loans. 

 

Literally, the options are almost endless as this is your money and you basically do whatever you want with it.

Is the money taxable?

Money from your home equity is not “earned” income and thus, it is not taxable. This is like having money in a savings account. You do not have to report the amount of money that you take from your equity to the IRS or your local tax agency. Also, taking cash from your home does not increase your property taxes or your homeowners insurance.

How much money can you take from your equity?

There are two rules of thumbs when it comes to finding out how much cash you can take from your home.

For loans such as conventional and FHA, the maximum loan that you can take if you are doing a cash out refinance is 80% of the property’s value. This is also referred as 80% Loan to Value.

For example, if you currently owe $200,000 and your home is worth $300,000, the maximum loan amount you can take is $240,000. The difference between $240,000 and $200,000 is your cash out, in this case, $40,000. This example does not assume closing costs or escrow set up costs.

The VA loan allows cash out refinances up to 90% loan to value. USDA loans do not allow cash out refinances.

What is the difference between a cash out refinance and a home equity line of credit (HELOC)?

A Home Equity Line of Credit is a type of mortgage that is considered to be “revolving”. Think of a credit card but one that uses your home as collateral, hence the term, home equity.

HELOCs are normally put on as second or junior liens on your property. When taking a HELOC, you do not have to touch your current mortgage as this is a separate loan altogether with a different rate and payment. Compared to a cash out refinance, which is only one loan, that replaces your current one and gives you the difference in cash.

Pros of doing a cash out refinance

You will want to look into a cash out refinance if:

  • Current mortgage rates are lower than what you have on your present loan. This gives you a double opportunity – to save on interest payment and give you the desired cash you need.
  • Save on unsecured interest payments. For instance, credit cards or personal loans carry much higher interest rates than mortgage loans.
  • You need to borrow more than what a personal loan or a credit card allows you to. Depending on how much equity you have in your home, you might be able to get a larger amount of cash than you could with unsecured debt alternatives
  • Get a lower monthly payment on borrowed money. Because mortgages typically carry longer terms, you’ll have more affordable monthly payments than you would with a credit card or personal loan, which usually have shorter terms.

How to start the process?

Getting a cash out refinance isn’t really much different than getting a regular refinance loan. At Andes Mortgage LLC., one of our biggest strengths is putting together plans for our clients to ensure that a cash out refinance is the right play for them. Get the right information for your unique situation in a few minutes by clicking this link and answering a few questions.

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