Homeowners have a significant opportunity to refinance with cash out that provides many incredible financial benefits. There comes a time in life when you may need to fund a major purchase and you do not have the cash in your savings account. Rather than running up high interest rate credit cards, many Americans choose to tap the equity in their home through cash out refinancing.
Borrowing equity from your home can make good financial sense in many situations. Perhaps you need money to pay for a healthcare emergency, a college education, or want to renovate your kitchen and bathroom. These things can cost a lot of money, and many people use their home’s equity to fund them.
Advantages of Borrowing Equity to Access Quick Cash
Everyone’s financial picture varies, but generally you can enjoy the following financial benefits by borrowing home equity:
- You will usually enjoy much lower interest rates than personal or credit card loans. Your home secures the loan, meaning if you don’t pay, the lender can repossess the home. Therefore, most mortgage loans of all types will have lower interest rates than other loans. Be sure you pay your home equity loan as you can lose your home!
- Mortgage interest is tax deductible for most people, while most other types of cash out loan interest are not.
- There are many types of refinance with cash out options today to get the funds for what you need.
Ways to Refinance with Cash Out
The cash-out mortgage market is very active today and lending guidelines are more flexible than several years ago. If you have equity in your home, you may be able to take some of it out with one of the refinance with cash out options highlighted below:
Cash Out Refinance from FHA
FHA liens are insured by the Federal Housing Administration and offer lower interest rates and more flexible credit and income requirements than other types of refinances.
If you have average credit and moderate income, you may find that cash out FHA refinance programs could be the best fit for you. Because the loans are backed by the US government, FHA-approved lenders are more willing to offer loans to people who may not be able to qualify for conventional refinances.
As with any mortgage, there are downsides to consider as well. All FHA loan requirements have implemented insurance premiums in case you default on the loan. You have to pay both an upfront mortgage insurance premium and a monthly premium as well.
Because of the extra costs, it is a good idea to consider a conventional refinance IF you have a lot of equity and you have the credit to get a conventional loan.
Fannie and Freddie Cash Out Refinance
These are conventional cash out refinance loans that are backed by Fannie Mae and Freddie Mac. Many people decide to get a conventional cash out refinance because the interest rates are low in 2017. There also is no mortgage insurance premium.
You will need to have better credit than an FHA refinance loan, but it will all come down to the specifics of your credit and financial situation. You can still get a Fannie or Freddie refinance loan with cash out if you have 650 credit, but expect to pay a rate of at least .25% more.
Keep in mind if you do not have 20% equity, you still will need mortgage insurance. But at least it is not as expensive as FHA mortgage insurance.
Home Equity Line of Credit
If you are happy with the interest rate on your first mortgage, you may not want to do a cash out refinance at all.
Instead, you should consider a second mortgage, such as a home equity credit line or HELOC. This second mortgage is secured by your home as collateral. So, just as with your original home loan, you can get a low interest rate, although it will be a bit higher than the first.
A HELOC loan is actually revolving line of credit that is similar credit card. You will be approved for a certain credit limit, just like a credit card. It is an adjustable rate that can go up over time. It also features an interest only payment for the first five or 10 years. But after that, you will need to pay interest and principal, so the payment will hike substantially at the point.
A home equity line of credit usually has a lower interest rate than a home equity loan, which we detail below.
A HELOC again is a credit line, meaning that you can use it over a long period of time. You only need to pay interest on the part of the credit line you have used.
A home equity credit line can be a good choice for paying for a college education or a home renovation; that is, something that needs to be paid for over time. With that being said, the HELOC rates are variable so you want to make sure you have budgeted the potential rise in interest rates over time.
Home Equity Loan
The other type of second mortgage is a home equity loan. The loan term on this 2nd mortgage lien can be from five to 15 years. In most instances, second mortgage rates are pretty-low, but verify the interest rates and fees with a licensed lender, broker or credit union. The term and interest rate are fixed. Thus, the rate will be higher than a HELOC usually, but you will have a fixed payment that you can count on throughout the loan term.
This loan differs from a credit line also because you receive the entire lump sum of cash at one time. This type of cash out loan is a good option if you have one, big expense to pay for, such as a health care emergency.
The Bottom Line When Refinancing for Cash
A huge benefit of home ownership is that the home generally increases in value over time. You also pay down your mortgage over time, and you gain equity. You have the option as a home owner to tap that equity to pay for things you need, if you meet the qualifications of your lender.
Above we have highlighted the basic ways to get your equity, either in a cash out refinance or in a second mortgage. Which you will choose depends upon your finances, your loan term, interest rate, income and credit.
Keep in mind that a cash out refinance requires more paperwork and qualification as it is a larger amount than a second mortgage. In most instances, a Cash out refinance will take longer.
On the other hand, an equity line of credit or a home equity loan can often be completed more quickly. It is generally a smaller loan, so the qualification process is usually faster.
Whichever route you choose, tapping your home’s equity is often a good option to pay for things that you really need but lack the cash to pay for.
We recommend that you shop carefully and determine what your financial goals are before you decide which loan to obtain.