WHAT IS A CASH OUT REFINANCE?
A cash-out refinance is a mortgage refinancing option where a homeowner replaces their existing mortgage with a new one for a larger amount, using the equity they’ve built up in their home. The homeowner receives the difference between the new loan amount and the remaining balance of the old mortgage as a lump sum of cash.
Key Features of a Cash-Out Refinance:
New Loan Amount: The new loan amount is based on the home’s current market value and typically allows borrowers to access up to 80% of that value, though some programs like VA loans may allow for higher limits.
Interest Rate: The interest rate may differ from the original loan, often depending on creditworthiness and market conditions.
Loan Terms: The new loan may have a different term length (e.g., 15, 20, or 30 years).
Common Reasons for a Cash-Out Refinance:
Home Improvements:
Many people use the funds for renovations or repairs, which can increase the home’s value and improve quality of life.
Debt Consolidation:
Paying off high-interest debt, such as credit cards or personal loans, with the lower interest rate of a mortgage can save money in the long term.
Major Expenses:
Funds can be used for significant expenses, such as medical bills, education costs, or starting a business.
Investment Opportunities:
Some homeowners use the cash to invest in property, stocks, or other financial ventures.
Emergency Fund:
Cash-out refinances can provide a financial cushion for unforeseen circumstances.
Lower Interest Rates:
If interest rates are lower than the rate on the original mortgage, a cash-out refinance might combine equity access with savings on interest over time.
The Role of Credit Scores in Cash-Out Refinancing
Your credit score can play a crucial role in the loan approval process and the terms you receive for a cash-out refinance. Lenders use your credit score to evaluate your financial reliability and determine the risk involved in granting a loan based on underwriting criteria.
Impact on Interest Rates
Credit scores can directly influence the interest rate you'll qualify for:
Higher Credit Scores (740+): Unlock the best rates and terms, resulting in significant savings over the life of the loan.
Moderate Scores (620–739): Likely to qualify for a loan, but with slightly higher rates.
Lower Scores (Below 620): May face higher interest rates or even denial of the refinance request.
Cash-Out Refinance vs. HELOC: Key Differences Explained
When it comes to leveraging the equity in your home under 62 years of age, two common options stand out: a cash-out refinance and a home equity line of credit (HELOC).
While both allow you to access the value built up in your home, they differ significantly in structure, benefits, and ideal use cases. Understanding these differences can help you make the best financial decision for your needs.
Key Differences
Cash out Refinance Features - Lump sum at closing, fixed or adjustable rate, fixed monthly payment, replaces your current mortgage in 1st lien position
Heloc - Borrow flexibly as needed, usually a variable rate with some fixed options, interest only draw period then full repayment on an amortization schedule, leaves your 1st mortgage lien in place if applicable
Which One Should You Choose?
Both options can help you access your home equity, but the right choice depends on your financial goals and needs. Consult with a mortgage professional to determine the best fit for your situation.
