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Refinance

Can a Cash-Out Refinance Help with Major Expenses?

Read Time: 3 Minutes Date Published: June 20, 2024
Topics:
Cash-Out Refinance Refinance Home Improvement
Homeownership is not just about having a place to live; it can also a significant financial asset that can grow in value over time. This value, known as home equity, is the difference between your home's current market value and the outstanding balance on your mortgage. A cash-out refinance allows you to tap into this equity to cover major expenses. Let's explore how this works and the benefits and drawbacks associated with using a cash-out refinance.
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What is a Cash-Out Refinance? †

A cash-out refinance involves refinancing your existing mortgage for a higher loan amount than you currently owe, with the difference paid out to you in cash. This new loan replaces your original mortgage, and you start making payments based on the new loan terms. It's essential to ensure that your new payments are affordable, as you will be using your home as collateral.

How It Works

  • New Loan Amount: The new loan typically covers up to 80% of your home's appraised value, although some mortgage programs may allow for higher amounts.
  • Interest Rates: Cash-out refinances1 may come with slightly higher interest rates compared to standard refinances.2
  • Closing Costs: Be prepared for closing costs, which can be higher than those associated with other types of loans.

Popular Uses for a Cash-Out Refinance

1. Paying for College

Higher education expenses can be daunting, and a cash-out refinance offers a way to manage these costs.

Pros:
  • Flexible Spending: The lump sum received can be used for various college-related expenses, including tuition, books, and room and board.
  • One-Time Cash: Provides a substantial amount of money upfront to cover significant expenses.

Cons:

  • Financial Aid Impact: The lump sum may affect your Expected Family Contribution (EFC) on the Free Application for Federal Student Aid (FAFSA), potentially reducing the financial aid package.
  • Extended Mortgage Term: Refinancing introduces new loan terms, which could extend the life of your mortgage and increase the total cost.

2. Financing a Home Addition or Renovation

Home improvements can enhance your living space and increase your home's value.

Pros:

  • Budget Flexibility: Provides the funds needed for renovations without straining your budget.
  • Increased Home Value: Strategic renovations can increase your home's market value, potentially building more equity.

Cons:

  • Higher Closing Costs: Compared to traditional home improvement loans, refinancing may come with higher closing costs.
  • Need for Detailed Planning: Ensure that the renovation costs and potential increase in home value justify the refinance.

3. Consolidating High-Interest Credit Card Debt

Using a cash-out refinance to consolidate debt can simplify payments and reduce interest costs.

Pros:

  • Lower Interest Rates: Mortgage rates are typically lower than credit card interest rates, providing potential savings.
  • Debt Management: Consolidating multiple debts into one can make financial management easier.

Cons:

  • Temporary Fix: Without changes to spending habits, debt consolidation might only provide temporary relief.
  • Risk to Home: Your home serves as collateral, so failure to make mortgage payments could result in foreclosure.

Things to Consider Before Proceeding

 

Affordability of New Payments

Ensure that you can comfortably manage the new monthly payments, considering both the higher loan amount and the potential for higher interest rates.

Long-Term Financial Impact

Evaluate how the new loan terms will affect your overall financial health. Extending the loan term could mean paying more in interest over time, even if your monthly payments are lower.

Conclusion

A cash-out refinance can be a powerful tool for managing major expenses, from funding education and home improvements to consolidating debt. However, it's crucial to weigh the pros and cons carefully and consider your long-term financial goals. For many homeowners, a cash-out refinance offers a viable solution, while others might benefit from alternative loan programs like the Newrez Home Equity Loan.

If you have more questions or need personalized advice, we're here to help. Contact one of our loan officers to discuss your options and determine the best course of action for your financial situation.

Disclaimers:

1 Source: Current Cash-Out Refinance Rates – Forbes Advisor
2 Source: Compare Today's Best Mortgage Refinance Rates (investopedia.com)

Learn more in our other educational series.

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Why Newrez?

Newrez believes the lending business shouldn't just be about home loans - it should be about homeowners. That's why our employees get to know our customer's real needs, through final closing, and beyond.

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Disclosures

†By refinancing an existing loan, the total finance charges may be higher over the life of the loan.

††The rate on your existing mortgage will not change. The Newrez Home Equity Loan program requires borrower to obtain a second mortgage at current market rates. Loan amount based on underwriting guidelines. Minimum 660 credit score. Minimum and maximum loan amounts apply. Program financing only available on properties with one existing mortgage lien and subject to maximum loan-to-value ratio. Not available in all states or territories. Other terms and restrictions apply. Please contact us for more information.

^ This HELOC is an open-end line of credit, available on owner occupied properties, where 75% of the approved full credit limit (minus the origination fees) will be drawn at the time of closing. Additional draws may be available after a 90-day period within the first 3 years not to exceed the available credit limit. Actual rates available to you may vary based on several factors including your credit score and combined loan-to-value. Loan amounts range from $50,000 to $350,000. We may determine home value and resulting equity through independent data sources and automated valuation models. An appraisal may also be required. Only available for eligible borrowers and property types. Not all applicants will be approved, pre-approval is based on data you have provided and certain assumptions that must be verified and subject to underwriting approval. Not available in all states or territories. Contact Newrez for more information.