Cash-out refinancing is the process of replacing an existing home loan with a larger principal loan at a lower interest rate. Apart from benefiting from a lower interest rate, the main purpose of cash-out refinancing is to release some equity in the property to use for other purposes, such as consolidating other debts.
During the life of your loan, the equity of the home increases as you pay it off. The equity of your home may also increase if your property value increases due to the market changes or other factors. Whatever the reason, a cash-out refinance can best be utilized in your favor if you have built up significant equity in your home.
The most important utilization of cash-out refinancing is to consolidate debts. Credit card companies comparatively charge much higher interest rates than mortgage loans. If you have built up a significant amount of credit card debt, you can pay it off using the extra amount of cash received from a cash-out refinance.
Though cash-out refinancing can help you to consolidate your debt, in many cases cash-out refinancing is more risky. You should consider cash-out refinancing if you meet the following criteria:
1. After refinancing, your monthly payment should be lower or roughly the same.
2. The extra amount received from the loan should be sufficient to pay off other debts.
3. Current interest rates should be low enough to warrant cash-out refinancing.
4. You plan to have a major change in your expenditures which goes in favor of your loan payment.
The cash obtained from a cash-out refinancing can be used for any purpose. If you have several loans and mortgages with variable rates and terms, with cash-out refinancing you can consolidate your loan by paying off smaller loans or a loan that has a higher interest rate. Cash-out refinancing is also suitable if you want to avoid incurring another new loan for other purposes.
After consolidating other debts with cash-out refinancing, your overall monthly mortgage payment might be higher than it was previously. However, you will reap the benefit by getting rid of other high interest rate debt.
Cash-out refinancing ultimately increases your overall mortgage debt. It is very important that after a cash-out refinancing you make the necessary adjustments to your daily expenditures. Because the debt is secured by your property, you have a comparatively greater chance of losing your home.
When is it worthwhile to opt for cash-out refinancing?
Make sure you understand the consequences of using cash-out refinancing to consolidate your debts.
Cash-out refinancing involves replacing your current home loan with one which bears a larger principal. Although you may benefit from a lower interest rate, the main goal of cash-out refinancing is to access some of the equity you have built up in your property.
How does cash-out refinancing work?
The difference between the market value of your property and what you still owe to your lender is known as equity. When you opt for cash-out refinancing, you can access part of that equity. The cash you receive can be used to consolidate your debts or to finance a large expense.
However, you can only opt for cash out refinancing if you have built up some equity in your property. For instance, if your property is worth $200,000 and you still owe your mortgage lender $125,000, the difference ($75,000) will be your equity. You will be able to access part or all of this equity, depending on your lender’s policy.
Why use cash-out refinancing to consolidate debts?
If you have accumulated $30,000 in credit card debt, you are likely to be paying an interest rate close to 20 percent on that debt. Opting for cash-out refinancing would enable you to incorporate that debt into your mortgage principal. First, you would be charged a lower interest rate on that sum. Second, the interest payments you make could reduce the amount of tax you owe.
Is cash-out refinancing right for you?
In some circumstances, cash-out refinancing is the best option available to an individual who wishes to consolidate debt. To help you establish whether you should look into this type of refinancing, try to answer the following questions:
– Will your monthly mortgage payments remain roughly the same?
– Will the cash payment you receive be sufficient to pay off your debts?
– Are current interest rates low enough to warrant cash-out refinancing?
– Will you be able to change your spending habits after paying off your current debts?
If you can confidently answer “yes” to all or most of these questions, then you may want to find out more about cash-out refinancing to consolidate your debts.
However, remember that cash-out refinancing is not always the right solution. It can be counterproductive if you do not change your spending habits. Remember that the debt will be incorporated into your mortgage and will be secured against your home. If you get into debt again after refinancing, you could lose your property if you do not keep up with your payments.
The basics of cash-out refinancing
How does cash-out refinancing work? Did you know it can help you consolidate your debts?
Cash-out refinancing can be a good solution if you are trying to consolidate your debts. However, it is only worth considering if you are willing to curtail your spending too.
Cash-out refinancing: what is it?
Cash-out refinancing involves replacing your current home loan with one which bears a greater principal. This enables you to receive a cash payment which you can use to pay off your debts or finance a large expense.
How does cash-out refinancing work?
Cash-out refinancing enables you to free up some of your home equity. Home equity refers to the difference between a property’s current market value and the balance owed on the home loan. For instance, if your property is currently worth $275,000 and you still owe your lender $150,000, you will have built up $125,000 in equity. If you opt for cash-out refinancing, you will be able to access part of that $125,000.
Can I use the cash as I wish?
The cash you receive following cash-out refinancing can be used for almost any purpose. If you have accumulated debts, it is a good idea to use it to pay them off. For instance, if you have credit card debts, you credit card company will be charging you a high interest rate on your balance. By incorporating that debt into your home loan, you will benefit from a much lower interest rate. For instance, if your credit card balance is $20,000, you can increase the principal on your home loan by that same amount. You will receive a $20,000 cash payment which can be used to pay off your credit card balance.
Because your old credit card debt has now been incorporated into your home loan, you will now be paying a much lower interest rate on that $20,000 since credit card companies frequently charge borrowers an interest rate close to 20 percent. In addition, your interest payments will now be tax-deductible.
Cash-out refinancing could raise your monthly mortgage payments. However, the overall interest charges will be lower, since you are no longer paying a high interest rate to your credit card company.
Can cash-out refinancing really get me out of debt?
Cash-out refinancing can help you consolidate your debts. However, you will also need to curtail your spending for it to be beneficial. Indeed, there is no point in opting for refinancing if you are not willing to modify your spending habits as well. Refinancing will increase your total mortgage debt. That debt is secured on your property. If you accumulate further debt, you may struggle to meet your monthly mortgage payments and could end up losing your home.
Although cash-out refinancing involves risks, it is a good way of paying off a debt which carries a high interest rate.