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When to do cash out refinance?

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Answer # 1 #

A cash-out refinance is a mortgage refinancing option that lets you convert home equity into cash. A new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash.

In the real estate world, refinancing in general is a popular process for replacing an existing mortgage with a new one that typically extends terms to the borrower that are more favorable. By refinancing a mortgage, you may be able to decrease your monthly mortgage payments, negotiate a lower interest rate, renegotiate the periodic loan terms, remove or add borrowers from the loan obligation, and, in the case of a cash-out refinance, access cash from the equity in your home.

A cash-out refinance allows you to use your home as collateral for a new loan as well as some cash, creating a new mortgage for a larger amount than what is currently owed. Getting cash by using the equity in your home can be an easy way to get funds for emergencies, expenses, and wants.

Borrowers seeking a cash-out refinance find a lender willing to work with them. The lender assesses the current mortgage’s terms, the balance needed to pay off the loan, and the borrower’s credit profile. The lender makes an offer based on an underwriting analysis. The borrower gets a new loan that pays off their previous one and locks them into a new monthly installment plan. The amount above and beyond the mortgage payoff is issued in cash.

With a standard refinance, the borrower would never see any cash in hand, just a decrease to their monthly payments. The funds from a cash-out refinance can be used as the borrower sees fit, but many typically use the money to pay for big expenses such as medical or educational fees, to consolidate debt, or as an emergency fund.

A cash-out refinance results in less equity in your home, which means that the lender is taking on greater risk. As a result, closing costs, fees, or interest rates can be higher than a standard refinance. Borrowers with specialty mortgages like U.S. Department of Veterans Affairs (VA) loans, including cash-out loans, can often be refinanced through more favorable terms with lower fees and rates than non-VA loans.

Savvy investors watching interest rates over time typically will jump at the chance to refinance when lending rates are falling toward new lows. There can be a variety of different types of options for refinancing, but in general, most will come with several added costs and fees that make the timing of a mortgage loan refinancing just as important as the decision to refinance.

In addition to checking rates and fees to make sure that refinancing is a good option, consider your reasons for needing the cash. This refinancing option typically comes with lower interest rates than unsecured debt, like credit cards or personal loans, does. However, unlike a credit card or personal loan, you risk losing your home—if you can’t pay your mortgage, for example, or if the value of your home goes down and you end up underwater on your mortgage.

Carefully consider if what you need the cash for is worth the risk of losing your home if you can’t keep up with payments in the future. If you need the cash to pay off consumer debt, take the steps you need to get your spending under control so you don’t get trapped in an endless cycle of debt reloading. The Consumer Financial Protection Bureau (CFPB) has a number of excellent guides to help determine if a refinance is a good choice for you.

The cash-out refinance gives the borrower all of the benefits they are looking for from a standard refinancing, including a lower rate and potentially other beneficial modifications. Borrowers also get cash paid out to them that can be used to pay down other high-rate debt or possibly fund a large purchase. This can be particularly beneficial when rates are low, or in times of crisis—such as in 2020–21, in the wake of global lockdowns and quarantines, when lower payments and some extra cash may have been very helpful.

Say you took out a $200,000 mortgage to buy a property worth $300,000, and, after many years, you still owe $100,000. Assuming that the property value has not dropped below $300,000, you have also built up at least $200,000 in home equity. If rates have fallen and you are looking to refinance, you could potentially get approved for up to 80% of the equity in your home, depending on the underwriting.

Many people wouldn’t necessarily want to take on the future burden of another $200,000 loan, but having equity can help the amount you can receive as cash. Let’s say your lender is willing to lend out 75% of your home’s value. For a $300,000 home, this would be $225,000. You need $100,000 to pay off the remaining principal. This leaves you with $125,000 in cash.

If you decide to only get $50,000 in cash, you would refinance with a $150,000 mortgage loan that has a lower rate and new terms. The new mortgage would consist of the $100,000 remaining balance from the original loan plus the desired $50,000 that could be taken out in cash.

In other words, you can assume a new $150,000 mortgage, get $50,000 in cash, and begin a new monthly installment payment schedule for the full amount. That’s the advantage of collateralized loans. The disadvantage is that the new lien on your home applies to both the $100,000 and the $50,000, since it is all combined together in one loan.

As mentioned above, borrowers have a variety of options when it comes to refinancing. The most basic mortgage loan refinance is rate-and-term refinance, also called no cash-out refinancing. With this type, you are attempting to attain a lower interest rate or adjust the term of your loan, but nothing else changes on your mortgage.

For example, if your property was purchased years ago when rates were higher, then you might find it advantageous to refinance to take advantage of lower interest rates. In addition, variables may have changed in your life, allowing you to handle a 15-year mortgage (saving massively on interest payments), even though it means giving up the lower monthly payments of your 30-year mortgage. With a rate-and-term refinance, you could lower your rate, adjust to a 15-year payout, or both. Nothing else changes, just the rate and term.

Cash-out refinancing has a different goal. You receive the difference between the two loans in tax-free cash. This is possible because you only owe the lending institution what is left on the original mortgage amount. Any extraneous loan amount from the refinanced, cash-out mortgage is paid to you in cash at closing, which is generally 45 to 60 days from when you apply.

Compared to rate-and-term, cash-out loans usually come with higher interest rates and other costs, such as points. Cash-out loans are more complex than a rate-and-term and usually have higher underwriting standards. A high credit score and a lower relative loan-to-value (LTV) ratio can mitigate some concerns and help you get a more favorable deal.

With a cash-out refinance, you pay off your current mortgage and enter into a new one. With a home equity loan, you are taking out a second mortgage in addition to your original one, meaning that you now have two liens on your property. This translates to having two separate creditors, each with a possible claim on your home.

Closing costs on a home equity loan are generally less than those for a cash-out refinance. If you need a substantial sum for a specific purpose, home equity credit can be advantageous. However, if you can get a lower interest rate with a cash-out refinance—and if you plan to stay in your home for the long term—then the refinance probably makes more sense. In both cases, make sure that you are able to repay the new loan amount because otherwise, you could end up losing your home.

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Lea Chaves
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Answer # 2 #

A cash-out refinance replaces your existing mortgage with a new, larger mortgage. You withdraw the difference between the old mortgage and the new, and you can use the money however you want.

The most common ways homeowners use this cash, according to Freddie Mac’s most recent analysis, are to pay off bills or other debt (40%), for home repairs or new construction (31%), to increase their cash savings (14%), to buy a car (9%) or to pay for college (7%). Some borrowers used their cash for more than one purpose.

Cash-out refinancing lets you access your home equity through a first mortgage instead of through a second mortgage, like a home equity loan or line of credit. You will need to have 10% to 20% equity left after the refinance. The percentage required depends on the lender and whether you’re willing to pay for private mortgage insurance (PMI) on the new loan.

PMI is an extra cost that borrowers typically pay when they don’t put at least 20% down to buy a house or when they don’t have at least 20% equity after a cash-out refinance. It protects the lender if you stop paying your mortgage. A cash-out refinance may not be cost effective if you’ll have to pay PMI as a result.

How much money could you get from a cash-out refi? To calculate the amount, you need to know three things:

Lenders will use a physical appraisal or an automated valuation model—a software-based comparison of similar properties—to decide how much your home is worth. You’ll be allowed to borrow as much as 80% or 90% of that amount, depending on the lender’s rules. The 10% to 20% of your home’s value you can’t borrow is your retained equity.

From this new amount you can borrow, subtract what you owe on your current mortgage. The difference is the cash you’ll receive. While it might feel like a payday to you, it’s not taxable as income because it’s a loan. Also, you don’t have to cash out the full amount your lender allows you to; you can take less. Why pay interest and fees on money you don’t need to borrow?

A standard refinance, or rate-and-term refinance, changes your interest rate, the number of years you have to repay your mortgage or both. The most popular reason to do a standard refinance is to lower your interest rate.

Sometimes, homeowners who are getting a lower rate through a refinance will also move from a 30-year mortgage to a 15- or 20-year mortgage. This way, they don’t start all over on paying off their home, and they may even shave off years of payments. That means they’ll spend less money on interest in the long run. You can get a shorter term with either type of refi.

Other times, homeowners are motivated to refinance by financial constraints. A standard refi that restarts the 30-year payment clock can give you a lower monthly payment, especially if you’re getting a lower interest rate. A cash-out refi will usually increase your monthly payment because you owe more overall on the mortgage.

If you do a cash-out refinance, you will pay closing costs to get your new mortgage. Closing costs will vary by lender, location and home price, but typically range from 2% to 6%. You can pay these costs in one of three ways:

Paying your closing costs in cash will be the cheapest option, and you may be able to use the cash you’re getting through the refi to pay them. The biggest of these costs will be the mortgage origination fee that usually costs around 1% of the amount financed, or $1,000 for every $100,000 borrowed. Other closing costs include an appraisal, credit check, title search, title insurance, notary fee and recording fee.

You may pay a higher interest rate or more points on a cash-out refinance than on a standard refinance. Lender PennyMac’s 30-year conventional refinance rate for July 3 was 3.375% and assumes a $400,000 home value, $320,000 loan amount, $50,000 cash out, 740 FICO score and two discount points (a $6,400 fee on top of other closing costs). The same lender’s advertised rate for a regular refinance was 3.125% with one discount point, but also assumes a $220,000 loan amount.

There are three common reasons to use a cash-out refinance, but just because they’re frequent uses, doesn’t mean they always make financial sense.

Whether it’s your own education, a partner’s or your child’s, paying for it with a low-interest mortgage over 15, 20 or 30 years can seem more appealing than taking out higher-rate student loans with 10-year repayment terms. Before you do this, weigh the costs and benefits of student loans against the costs and benefits of borrowing against your home.

Here are three key considerations:

Who doesn’t want a new kitchen, a new bathroom or an additional room? People often justify home-improvement borrowing by saying it will increase their property’s value.

Remodeling.com’s 2020 Cost vs. Value report may disabuse you of that notion: It shows that home upgrades do not offer any return on your investment; they actually lose money, though certain markets and projects offer exceptions. Make your home nicer because you want to—not because “it will pay for itself.”

This use of mortgage debt is tax deductible if you itemize, but most people don’t.

You might have student loans, credit card debt, a car loan, a personal loan or all of the above. These debts probably all have higher interest rates than your mortgage. It can be appealing to consolidate multiple debts into a single monthly payment, especially when your interest rate will be lower.

When you exchange these debts for mortgage debt, however, you’re stretching out the time to repay them over 15 to 30 years. You may end up paying much more interest in the long run, as we illustrated in the student loan example above. You’ll also have the dangerous opportunity to keep using your credit cards to overspend, so you could end up in more debt than you started with.

A cash-out refinance is not the only low-cost way to borrow against your home’s value. Would one of these alternatives work better for you?

A home equity loan lets you borrow against your home’s value and gives you a lump sum, just like a cash-out refinance does. However, you’ll leave your existing mortgage alone and borrow the cash you need with a separate, smaller loan. If a cash-out refinance won’t give you a lower interest rate on your first mortgage, a home equity loan may be a better option.

The interest rate on a home equity loan is usually higher than the interest rate on a first mortgage or home equity line of credit. Expect to pay prime plus about 2% or so. The prime rate as of July 2020 is 3.25%, whereas the average 30-year fixed mortgage rate was about 3.03%, according to Freddie Mac’s Primary Mortgage Market Survey for July 9, 2020. However, with a home equity loan, you’ll be paying that higher interest rate on a smaller sum.

Because you’re borrowing less than you would through a cash-out refi, your closing costs will probably be lower. Also, you won’t lose ground on paying off your first mortgage, so you may pay less interest in the long run.

A home equity line of credit, or HELOC, lets you borrow smaller amounts as you need them instead of a larger amount all at once. The result? You may pay less interest.

HELOCs have lower interest rates than home equity loans, but higher rates than first mortgages. In a market where the rate on a 30-year refi is 3.03%, the rate on a 30-year HELOC might be 4.7%. Plus, a HELOC’s rate is usually variable, not fixed, so your payments may increase over time and will not be predictable.

HELOCs come with a unique risk that a cash-out refinance or home equity loan does not: The lender can freeze or reduce your line of credit without warning if economic conditions worsen, your home’s value declines or your financial circumstances change. In other words, the money might not be there when you want to use it.

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Hemen Wadia
SUPERVISOR SINTERING PLANT
Answer # 3 #

Let’s take a closer look at each of these steps.

Your lender sets their own requirements when it comes to deciding who qualifies for a refinance. Here are some of the most common cash-out refinancing requirements:

To refinance, you’ll usually need a credit score of at least 580. Many lenders require higher credit scores for cash-out refinances. However, there are exceptions.

Your DTI ratio is the amount of your monthly debts and payments divided by your total monthly income. For example, if you pay $1,500 in bills every month, including your mortgage, and you have a total monthly household income of $4,000, your DTI is $1,500 divided by $4,000, or about 37.5%. Most lenders prefer borrowers interested in refinancing their home loans to have a DTI of 50% or lower. However, it's possible to qualify with higher debt loads using FHA or VA loans.

You’ll need to already have a sizable amount of equity built in your home if you want to secure a cash-out refinance. Remember that your lender won’t let you cash out 100% of the equity you have unless you qualify for a VA refinance. Take a careful look at your current equity before you commit. Make sure that you can convert enough equity to accomplish your goals.

Once you know that you meet the requirements for a cash-out refinance, determine how much money you need. If you’re planning to use the funds for repairs or renovations, it’s a good idea to get a few estimates from contractors in your area so you know how much you need. If you want to refinance to consolidate debt, sit down with all of your credit card and bank statements and determine exactly how much cash you need to cover your debts.

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Elmyr Gleeson
Psychologist
Answer # 4 #

Cash-out refinancing lets you take out a new mortgage for more than you owe on your existing one — and keep the difference in cash. The amount you may qualify for depends in part on how much equity you have in your home.

You might use the money to invest in home improvements, consolidate high-interest debts or pay for other pressing needs — but a cash-out refi isn’t always your best option.

We’ll walk through how a cash-out refinance works, when it might make sense to consider and what alternatives you should weigh.

A traditional mortgage refinance and cash-out refi both involve taking out a new loan to pay off your existing mortgage. With a traditional refinance, you borrow about the same amount as you currently owe and try to get a lower interest rate, different term or both.

Your interest rate and term could also change with a cash-out refi, but the idea is to borrow more than you currently owe and use the extra cash for something else.

If you’re just looking to lower your interest rate, a traditional refi may be the better option because it tends to have lower rates than a cash-out refi.

“A cash-out refinance can be a great option if you were already planning to refinance your home loan, and you’ve built up equity in the home,” says Andy Taylor, GM of Mortgage at Credit Karma. “It’s essentially taking out another, larger loan to pay off your original mortgage, and using the extra money borrowed for cash in-hand.”

Generally, the maximum is 80% of your loan-to-value ratio, or LTV. For example, if your home is worth $100,000, you may only be able to borrow a total loan amount of $80,000.

To qualify for a cash-out refinance, you’ll generally need to get your home appraised. The appraisal value may impact how much money you can take out, as it determines the home’s value for the loan-to-value ratio.

After paying off the original mortgage and associated fees, there aren’t usually any restrictions around how you use the money you receive on a cash-out refinance. But consider carefully how you choose to spend it.

“People might regret using the money to splurge on a luxury,” says Rebekah Tardieu, a mortgage loan originator with Cardinal Financial Company in Melville, New York. She suggests “trying to use the money to put yourself in a better financial position.”

If you’ve accumulated equity in your home, it makes sense that you want to tap into it to achieve another financial goal. Here are some situations when you might want to consider a cash-out refinance.

While there may be many reasons you want a cash-out refi, it might not always make sense. Here’s why.

If refinancing won’t lower your interest rate, you may want to consider a home equity line of credit (HELOC) or home equity loan (HEL) instead. These are sometimes called second mortgages, but they won’t replace your mortgage or change your mortgage terms.

A home equity loan gives you a lump-sum payout and uses your home as collateral. A HELOC also uses your home as collateral, but you can borrow money as needed until you’ve maxed out the line of credit or the draw period ends (often 10 years later).

While the interest rate on a home equity loan or HELOC might be higher than what you’d pay on a cash-out refi, you won’t lose your current mortgage rate, and you might not have to pay as much in closing costs. You should crunch the numbers to figure out which option is best for you.

If you think a cash-out refinance is a good possibility for you, make sure to compare mortgage lenders. If you’re shopping for a mortgage, you have a window of time where multiple credit inquiries are only counted as one for your credit scores. You typically have 14 days — though it could be longer depending on the scoring model.

Here are some questions to ask yourself.

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