If you’re thinking about refinancing your mortgage you’re not alone. A cash-out refinance can be a smart move for a lot of homeowners.
Yes, interest rates appear to have bottomed out and have risen slightly over their historic lows. Yet millions of other homeowners can still benefit by refinancing for more than just the rate. For borrowers who are holding onto a hybrid loan or are now on a loan that can adjust once per year, it might very well be time to switch into a fixed-rate loan and lock in these rates. But while they’re at it they might also consider converting some of their equity into cash to be used for other purposes. After a careful examination of current credit obligations paying off some outstanding revolving or installment debt can dramatically increase an individuals’ cash flow.
How Cash-Out Refinancing Works
For example, a couple is in the process of refinancing out of a 3/1 ARM and locking in a 20-year fixed-rate loan. They have an outstanding loan balance of $200,000 and the property has been appraised at $350,000. They have locked in a rate of 4.00% and the new principal and interest payment will be $1,211 per month. Their ARM has yet to adjust but they want to get out of a loan program that can adjust each and every year. Their current rate is 3.5%. They also have an automobile loan they took out last year that still has four years remaining and the monthly payment for that car is $585 per month and the balance on the car loan is $45,000. By adding the automobile loan into the mortgage and paying off the car loan and the 3/1 ARM, the new mortgage amount is $245,000 and the new mortgage payment is $1,484. By paying off the car loan the couple is now saving $312 per month. Without paying off the car loan and refinancing just the outstanding balance the monthly payments for both is $1,796.
Benefits of Cash-Out Refinancing
Cash out refinancing certainly isn’t restricted to an automobile loan. When pulling out cash the borrowers can use those proceeds for pretty much anything they want. Are there any outstanding student loans that need to be taken care of? What about credit card balances, can they be paid off or reduced? Tapping into homeowner equity with a cash-out refinance can reduce overall monthly debt and eliminate outstanding obligations.
Or, borrowers can elect to leave the outstanding mortgage alone and obtain a home equity line of credit, or HELOC. A HELOC is a revolving line of credit very much like a credit card. A mortgage lender can approve a line of credit that is subordinated to the existing loan. Whenever the homeowners need or want quick access to cash all they need to do is take advantage of an existing HELOC. A HELOC can be used over and over again as homeowners tap into the line of credit and pay off the balance over time.
If you’re considering a refinance and wonder if pulling out cash is a good idea or you’d like more information about how HELOCs work, it’s time to take my 60-second refinance analysis here to see if a cash out refinance is the best fit for you.