With home values in San Diego rising and mortgage rates at some all-time lows, it can be a good time for homeowners to cash out on their equity. To help satisfy your curiosity on what a cash-out refinance is and how it can benefit you, we’ve put together the information you need to know in this article.
What is Cash-Out Refinancing
Cash-out refinancing is a form of refinancing your mortgage while also letting you access your home equity with a “cash-out.” Your home equity is what your home is worth (based on an appraised value) minus what you owe on a mortgage. During a cash-out refinance, you’ll take out a new and larger mortgage loan that pays off your existing loan and lets you keep the remaining balance as a “cash-out.”
Here’s an example with numbers:
- Home value: $400,000
- Current mortgage balance: $200,000
- Refinanced loan balance: $250,000
- Cash-out: $50,000 minus closing costs
Once the existing loan is paid off with your new loan balance, the remaining amount is the cash-out. However, you’ll also have to pay a closing cost that is typically between 3 and 5 percent of the new loan amount. Typically, you can cash out up to 80% of your home equity.
5 Benefits of Cash-Out Refinancing
Cash-out refinancing comes with multiple benefits that make it a better choice over taking out a second mortgage or personal loan. Here are the top 5.
1. Lower Interest Rates
The biggest benefit of a cash-out refinance is to get a new mortgage with lower interest rates. This is especially true if you bought your home when mortgage rates were higher.
2. Tax Deductions
When you use your cash-out funds to build, buy, or substantially improve your home, you may qualify for a mortgage interest deduction on your taxes.
3. Debt Consolidation
Funds from your cash-out refinance can be used to pay off debts, especially high-interest loans or credit cards. This will help you save thousands of dollars in interest fees.
4. Improve Your Credit Score
When you pay off your credit card debt in full, you can also boost your credit score by reducing your credit utilization ratio.
5. Have Money to Invest
Using funds from your cash-out refinance is beneficial when you invest it towards a college fund or your retirement savings. Considering the power of compounding interests, you can let your money work for you instead of being tied up in your home. You can also choose to purchase a new investment property to rent out!
Everyone’s situation is different and sometimes a conventional mortgage refinance might make more sense. To make sure a cash-out refinance is most suitable for your specific needs, contact our Loan Officers today for a free consultation. We can help take a closer look at your finances and advise you on your best options.
– The Zion Team
Phone: (858) 324-1951 | To schedule a meeting or call, click here.