5 Questions to Ask Before Getting Cash-out Refinancing
Childcare, a new car, college. Let’s face it. Life is expensive. But the good news is, there are lots of ways you can use the equity in your home to finance the things you need, including cash-out refinancing. It works a lot like regular refinancing only you can take your refinanced loan out for the total amount of equity you have in your home--not just how much you owe.
So if your home is worth $200,000 and you owe $100,000 on it, you can refinance for $200,000 and get the extra $100,000 as a lump sum. Cash-out refinancing isn’t the only way to use your home’s equity to finance the things you need now. Here's how to know if cash-out refinancing is right for you.
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How much equity do you have in your home?
A bank’s not going to give you a mortgage for more than your house is worth. And trust us, you don’t want to be in that position. So if you only have $20,000 in home equity, but you need $50,000 to pay for your child’s college, your cash-out refinance won’t cover the whole bill. Does it make sense for you to use your home’s equity or to finance the loan somewhere else?
Is this the best use of your home’s equity?
Are you going to invest it? Pay for your kids’ college? Pay for childcare? There are a lot of arguments for and against using your equity to pay for various life expenses.
What mortgage interest rate can you get?
If mortgage rates are low, it could be a good time to refinance. But if the interest rate on your loan is 3.5 percent and current interest rates are 5 percent to 7 percent, then you might want to think about getting your extra cash from somewhere else since you’ll end up paying much more on your loan over time. Our tip? Check your mortgage rates before you get started.
Adjustable or fixed rate?
When you refinance your old mortgage, you’re really getting a completely new one. So, just like when you got your first mortgage, you can choose between an adjustable-rate mortgage or a fixed-rate mortgage. There are pros and cons to each, so you’ll have to sit down and figure out which one makes the most sense for your family.
What are your closing costs?
Since you’re essentially paying off your old mortgage and getting a new one when you refinance, you’ll have to pay closing costs on your loan. This could be several thousand dollars, so make sure you account for that in the amount of cash you’re requesting. If you can’t afford to pay the closing costs, you might want to try a home equity line of credit (HELOC) instead. Your interest rates are probably going to be a little higher, but there won’t be any closing costs.