Wednesday, July 12, 2017

What Is A Cash-Out Refi And What Are My Options?

By Justin Woodbury

A cash out refinance is when the owner of a property takes out a new loan that replaces the old loan plus an additional amount that the borrower receives as a liquid amount. This cash can be used like any other cash to purchase or invest as they desire.

In contrast to a cash-out refinance, a standard rate/term refinance will serve a slightly different purpose. The standard rate/term refinance is essentially just that, one that has a purpose of changing the rate, or changing the term. For example, a borrower may be in a 30 year loan but their goal is to pay the home off in 15 years. They may refinance and change their standard monthly payment to that of the 15 year, which usually carries with it lower rates than a 30 year loan. This is due to the time value of money and risk level associated with the different term lengths. If the borrower is in an adjustable rate mortgage, they may refinance into a fixed rate mortgage so they are able to enjoy predictable payments.

Ever since the most recent financial crisis interest rates have been on a steady trend downward to the record lows at the time of this writing. The interest rates were brought downward in order to stimulate what could have been a severe depression. Consequently, at the time of this writing we are still very close to historic, record lows, but the federal reserve has indicated that they plan to move back upward toward the natural range that would be expected in a free market, without a stimulus.

Because the interest rates on a home loan are secured by real estate, you are likely to get a much lower interest rate on a home loan than you could for a personal loan or credit card. It is for this reason that many people all across the United States are turning to cash out refinances or home equity loans and second mortgages for their debt consolidation purposes.

By consolidating their debts into a mortgage loan, borrowers are able to free up some cash flow. They are able to do this because they are lowering their interest rate, stretching out the payoff term changing their interest type away from the highly credit toxic daily compounding interest rate of a credit card and from stretching the payment term out to the repayment term of the mortgage loan. There are sometimes costs associated with a refinance though so it is in your best interest to talk to a mortgage industry professional so that you may run a return on investment analysis to make sure the associated costs make sense. Most lenders will also have no cost options as well.

Homeowners are able to use the loan programs such as home equity loans, second mortgages, and cash-out refinances in order to add solar panels and save money on energy, for home improvements such as remodel or room additions, and possibly even adding value. Depending on your goals, it may make the most sense to save the cash out of pocket, which can sometimes be in the tens of thousands of dollars, and use home equity instead. Make sure you are taking your long term and short term goals in to account when you make these decisions. An experienced loan professional may be able to help.

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