If you have equity built up in your home and have outstanding debt, now could be the time to investigate a cash-out refinance. A cash-out refinance takes the equity in your home and uses it to pay off your debts at a lower rate than what you are currently paying, saving you potentially thousands of dollars. Here’s how it works:
Let’s say you have a $150,000 principal loan balance on your current mortgage, the value of your home has increased, and you have four debts with a cumulated balance due of $30,000. You get a cash-out refinance loan worth $180,000, leaving you a difference of $30,000 cash after closing*. Assuming the cash-out refinance rate is lower than the blended rate of your debt, you could potentially be saving money over the long term**.
There are things to consider when getting a cash-out refinance. Here are five ways your financial situation could be impacted by a cash-out refinance:
- Taking out a larger mortgage to get cash-out means likely having a higher monthly mortgage payment. And if your loan-to-value ratio (LTV) exceeds 80%, depending on the loan type, you could also add private mortgage insurance (‘PMI’) to those monthly costs.
- When you get a cash-out refinance, you’re essentially starting over on the length of your loan unless you refinance at a shorter term.
- A cash-out refinance will have closing costs that could impact the amount of cash-out you receive. Make sure you aren’t spending more than you save.
- Lenders will likely pull your credit when you apply, which can temporarily lower your credit score.
- Keep in mind there are LTV limitations on certain loan types and products, and you may not receive the amount of cash-out you need to cover debt.
Make sure the questions you ask yourself before proceeding with a cash-out refinance to pay down your debt include:
- Do I have enough equity built up?
- Is my credit strong enough to get a rate that makes sense for me?
- Can I afford the new mortgage payment?
- Is the amount of money I’d save each month less than I save in the long term?
A cash-out refinance can be an ideal way to help you save money, but it’s not the best option for everyone. If you would like to explore more about cash-out refinance opportunities and determine whether one might be right for you**, contact NASB at 855-465-0753. Or you can click here to enter your debt information to see what your savings would be.
*Please note that a cash-out refinance transaction will have closing costs that could impact the amount of cash-out received at closing.
**Debt consolidation does not pay off the debt; please consult a financial advisor regarding the effect of consolidating short-term debt into long-term debt. NASB does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your tax, legal, accounting, and financial advisors, as applicable, before engaging in any transaction.
