Buying a home is probably one of the biggest investments you’ll ever make, so you’ll probably want to make sure it’s as comfortable and updated as possible. However, it is sometimes difficult to save up enough money to complete home renovations and repairs.
Cash-out refinancing may be the answer for you. So you don’t have to use credit cards, personal loans, or second mortgages to achieve your home improvement goals. By refinancing for cash, you can also use the money you have already paid into your mortgage to pay for things like repair bills, consolidate your debt or even pay off your outstanding student loans.
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What Is A Cash-Out Refinance?
Your home gains equity as your mortgage matures. Equity refers to the portion of a home’s value that you have actually paid off. You can gain equity in two ways:
Your Home Increases in Value
Through your monthly mortgage payments, you pay down your mortgage principal. Your equity grows with each monthly payment you make on your loan.
Refinancing your mortgage and taking out cash in exchange for a larger loan is called a cash-out refinance. It takes advantage of the equity you’ve built over time. In other words, when you refinance using cash-out, you borrow more than what you owe on your mortgage, which you pocket as a result.
As opposed to a second mortgage, a cash-out refinance does not add another monthly payment to your list of bills – you simply pay off your old mortgage and replace it with your new mortgage.
Consider this scenario: You paid $60,000 for a home that cost you $200,000. Your home loan balance is $140,000. In addition, let’s assume that you want to make renovations worth $20,000 in your home.
You take a portion of your equity out of your house and add it to your mortgage principal as part of a cash-out refinance. The new mortgage would therefore be worth $160,000 – the original $140,000 you owed on the home plus the $20,000 you need for renovations. A few days after closing, you receive $20,000 in cash from your lender.
When you refinance, you can do anything you want with the money you take from your equity. You can make repairs on your property, catch up on your student loan payments or cover an unexpected medical or auto bill. Cash-out refinances also usually give you access to lower interest rates than credit cards.
How Much Cash Can You Get On A Refinance?
Typically, the amount you earn from a refinance depends on the value of your home. You will need to have your home appraised before determining how much you qualify for. Generally, lenders will let you borrow up to 80% of your home’s value. However, this can vary from lender to lender and may depend on your individual circumstances.