Introduction

Owning a home is a significant achievement that brings not the joys of homeownership but also potential financial opportunities. One such opportunity is a cash-out refinance, a transaction that allows homeowners to leverage their home equity. In this comprehensive guide, we will explore how a cash-out refinance works, including its benefits and potential risks to you. We hope this article will help you determine if it is the right for you.

Understanding Cash out refinance

A cash out refinance involves replacing your existing mortgage with a new one that is larger than your current loan balance. The difference between the new mortgage amount and the existing loan, minus closing costs, is distributed to you as cash. This process essentially allows you to convert a portion of your home equity into a liquid asset.

How it Works

To better understand cash-out refinance, let’s break down the process:

1. Assessing Home Equity: Before considering a cash out refinance, it’s essential to evaluate your home’s current value and the remaining balance on your mortgage. The difference between these two figures represents your home equity. The hard part is determining a how much your current home is worth. Sometimes it is best to estimate your home equity using a set of assumptions about the home value. Contact your Lakeside Bank mortgage loan consultant for assistance in figuring out some good assumptions.
   
   
2. Loan Application: Once you’ve determined the amount of cash that you want, you need to apply for a new mortgage from your Lakeside Bank mortgage loan consultant. Your loan officer can run scenarios to let you know the cash out for different home values. Also, he can get you a breakdown of the closing costs and pre-paid items for a cash-out refinance. Once you are happy with the numbers, then you will need to send over your income (paystubs, W2s, tax returns) and bank statements to your loan officer. You will also need to give your mortgage loan consultant permission to do a hard pull of your credit. No credible mortgage professional will move forward without these items. Once this is done, your Lakeside Bank mortgage loan consultant can lock in your rate and send you an electronic application to esign.
   
   
3. Appraisal: Once the mortgage application is complete, your Lakeside Bank mortgage loan consultant will put in your order for an appraisal. You will need to pay for the appraisal upfront via a secure credit card payment and then your loan officer will have the appraiser contact you directly to setup an in-person inspection of the property. You will need to make time in your calendar to let the appraiser into your home and it is highly recommended that you clean up your place in advance, so it shows well. The appraiser will apply a standard methodology for determining your home’s value. Although the appraiser will give you some credit for the condition and age of your property, home value is determined primarily by comparable sales in the neighborhood that occurred in the last year.
   
   
4. Approval: An underwriter will review your loan application, income documents, bank statements, credit report and appraisal to determine if you qualify for the mortgage. It may take a couple rounds of questions from the underwriter to finish this up.  It is a bit tedious but much easier than when you originally bought your home! Once your application is approved, the new mortgage pays off your existing loan, and the remaining funds are provided to you in cash via a check or wire transfer.

Benefits of a Cash-out Refinance

1. Access to Liquidity: One of the primary advantages of a cash out refinance is the immediate access to cash. Homeowners can use this liquid asset for various purposes, such as home improvements, debt consolidation, education expenses, or even investments in the stock market or an investment property.
   
   
2. Potential for Lower Interest Rates: Depending on market conditions, you might be able to secure a new mortgage with a lower interest rate than your existing loan. This can result in reduced monthly payments and long-term interest savings. Depending on the rate on your current mortgage, the interest rate on a cash out refinance may be higher. Contact your Lakeside Bank mortgage loan consultant to get an estimated rate and fees.
   
   
3. Tax Deductibility: In certain cases, the interest paid on a cash-out refinance may be tax-deductible, especially if the funds are used for home improvements. It’s crucial to consult with a tax professional to understand the specific implications in your situation.
   
   
4. Consolidation of High-Interest Debt: Homeowners burdened with high-interest debt, such as credit card balances, may find relief through a cash out refinance. By consolidating debts, you can potentially lower your overall interest rate and simplify your financial obligations. Although the rate on your cash-out refinance might be higher than your current mortgage, it is still cheaper than paying interest on credit card debt.

Considerations and Potential Risks

While cash out refinance offers several benefits, it’s essential to consider potential risks and drawbacks:

1. Increased Debt: By tapping into your home equity, you are increasing your overall mortgage debt. Even though you are increasing your mortgage debt, you may also be decreasing your monthly payment depending on the term of the loan and your interest rate. It’s crucial to use the funds wisely and avoid unnecessary expenses.
   
   
2. Higher Interest Rate: A cash-out refinance may come with a higher rate than what you have now. If you bought your home or refinanced your mortgage when rates were historically low, a cash out refinance today will have a higher interest rate. Compared to credit debt, the rate for a cash-out refinance will always be lower so it is still a great idea for debt consolidation or a home improvements. Although the interest rate may be higher than you like, the cost of a cash out refinance is likely less than any other form of financing in the current market. If you need money for home improvements or education costs, it is still your cheapest option.
   
   
3. Closing Costs: Just like with the initial mortgage, a cash-out refinance comes with closing costs. These costs can offset some of the financial benefits, and it’s important to factor them into your decision-making. The good news is that you can pay the closing costs out of the cash that you are receiving so there will be minimal out of pocket costs. Make sure you contact your Lakeside Bank mortgage loan consultant to get an estimate of the fees and cash coming back to you.
   
   
4. Home Value Fluctuations: Real estate markets can be unpredictable. Because your mortgage debt is higher with the cash out refinance, you have less equity in your home. If your home’s value decreases, you may find yourself with even less equity than expected. This can impact your ability to sell or refinance in the future.
   
   
5. Risk of Foreclosure: If you are unable to meet the new mortgage payments, you risk foreclosure. It’s crucial to assess your financial stability and ensure that you can comfortably manage the increased debt. As stated above, it is important to use the cash for something that is important and necessary. It is never a good idea to use cash out of your home for a vacation or unnecessary expenses.

Is Cash-out Refinance Right for You?

Determining whether cash out refinance is the right choice requires careful consideration of your financial goals, current circumstances, and plans. Here are some key questions to ask yourself:

1. Financial Goals: What are you hoping to achieve with the funds from a cash-out refinance? Whether it’s home improvements, debt consolidation, or other investments, having a clear goal will help you make informed decisions.
   
   
2. Current Interest Rates: Are current interest rates lower than your existing mortgage rate? If so, you may benefit from refinancing. If rates are higher, is a cash out refinance your cheapest way to get cash? How does the picture look when you include closing costs?
   
   
3. Financial Stability: Do you have a stable income and the ability to manage the increased debt load? Assessing your financial stability is crucial to avoid potential pitfalls.
   
   
4. Market Conditions: Consider the current state of the real estate market. If your home has appreciated in value, it may be a favorable time for cash-out refinance. Do not count on real estate prices always staying the same or going up. What goes up must come down!
   
   
5. Long-Term Plans: How long do you plan to stay in your current home? If you anticipate moving soon, the costs associated with refinancing may outweigh the benefits. If you need the cash to buy a new home, then it may be the perfect solution.

Conclusion

A cash out refinance can be a powerful financial tool when used strategically. By tapping into your home equity, you can access funds for important life events or investments. However, it’s not without risks, and careful consideration is necessary before making this financial decision. Ultimately, consulting with financial professionals, including your Lakeside Bank mortgage loan consultant, can provide personalized insights based on your unique situation. As with any significant financial decision, the key is to make informed choices that align with your overall financial goals and circumstances.