Replacing your mortgage with a cash-out refinance is a great way to get extra funds and expand on your financial stability. But what can cash-out refinance money be used for? In just a few minutes, we’ll explain exactly what a cash-out refinance is, how you can best use your newly acquired funds, and more.
What is a cash-out refinance?
A cash-out refinance is a type of mortgage refinancing that lets you take out a new loan that is larger than your existing mortgage. This allows you to borrow against the equity in your home and receive a lump sum of cash at closing.
For example, let’s say that a homeowner has a mortgage balance of $300,000 and they want to refinance their mortgage. They decide to take out a new loan for $350,000. The difference between the new loan amount and the outstanding mortgage balance is $50,000, which is paid out to the borrower in cash.
Cash-out refinances allow homeowners to access their equity and use it for a variety of purposes. Below, we’ve outlined some of the most popular uses of cash-out refinance money seen today.
Common uses of cash-out refinance money
One way you can use a cash-out refinance is to skip a mortgage payment. Because the new loan you receive is larger than your existing mortgage, you can use the extra cash to make your next mortgage payment and effectively skip it.
In this case, however, it’s important to note that skipping a mortgage payment is not the same as not making a payment. When you skip a payment, you’re still responsible for paying that amount at a later date. The amount you skip will be added to the balance of your loan, which means you’ll be paying interest on it for the remainder of the loan term.
In addition to skipping a mortgage payment, you can also use a cash-out refinance to withdraw cash from your home’s equity. When you refinance, you can choose to receive a lump sum of cash at closing, which you can use for any purpose you choose. This can be a useful way to access the equity you’ve built up in your home and use it for almost anything you’d like.
Other common uses of cash-out refinance money include:
- Home improvements: You can use the cash to make renovations or upgrades to your home, such as updating the kitchen or bathroom, adding a deck or patio, or installing new windows or doors.
- Debt consolidation: You can use the cash to pay off high-interest credit card debt, personal loans, or other types of debt. This can help you save money on interest and simplify your monthly payments by combining multiple debts into one single loan.
- College tuition: You can use the cash to pay for college tuition for yourself or your children. This can help you save money on student loans and reduce your overall debt burden.
- Starting a business: You can use the cash to start a new business or expand an existing one. This can be a great way to invest in your future and create additional income streams.
- Investing: You can use the cash to invest in stocks, bonds, real estate, or other investments. This can help you grow your wealth and build a secure financial future.
- Emergencies: You can use the cash as a financial cushion in case of emergencies, such as medical bills, car repairs, or unexpected expenses.
These are just a few examples of how you can use the cash you get back from a cash-out refinance. The best use of the cash will depend on your individual circumstances and financial goals. It’s important to carefully consider your options and make a plan for how you will use the cash before you decide to move forward with a cash-out refinance.
How to prepare for a cash-out refinance
If you’re considering a cash-out refinance, there are a few steps you can take to prepare and increase your chances of getting approved for the loan. Here are some tips to help you prepare:
- Check your credit score: Your credit score is one of the most important factors that lenders consider when deciding whether to approve your loan. To get the best mortgage rate and increase your chances of getting approved, you should check your credit score and take steps to improve it if necessary. This can include paying your bills on time, reducing your credit card balances, and avoiding taking out new credit unless absolutely necessary.
- Gather your financial documents: You’ll need to provide a variety of financial documents to your lender when you apply for a cash-out refinance. These can include tax returns, bank statements, pay stubs, and proof of income. Gather these documents ahead of time to make the application process easier and faster.
- Shop around: Don’t just settle for the first mortgage rate you’re offered. Take the time to shop around and compare rates from multiple lenders. This will help you find the best rate and save you money in the long run.
- Understand the costs: A cash-out refinance can be a useful tool, but it’s not right for everyone. Before you decide to move forward with a cash-out refinance, it’s important to understand the costs and potential risks. This includes the fees you’ll need to pay, the effect on your monthly payments, and the potential impact on your long-term financial goals.
By following these steps and preparing ahead of time, you can increase your chances of getting approved for a cash-out refinance and make the process smoother and more efficient.
Total Mortgage experts are on standby across the country and are ready to help. Contact a loan officer today to learn more about your next steps to a cash-out refinance.
Source: totalmortgage.com