Equity is your money. When does it pay to use it?
Refinancing: Do You Want Cash Out?
One of the first questions asked by a Mortgage Advisor at CALIFORNIA MORTGAGE ADVISORS, INC. is whether or not you wish to take some cash out of your home equity. If your motivation is simply to achieve a lower interest rate, thus reducing the monthly payment, the question may come as a surprise.
Don’t let the surprise trip you up. There are many reasons that you may need cash out. This could be the opportune time use equity in your home to do a remodel, pay off debt, buy a new car, cover college expenses or just about anything you can think of. Maybe you just need a few thousand to do the landscaping project on your to-do list. The main motivation for cash out is debt consolidation. We encourage you to read our debt and loan consolidation page for thorough insight.
Equity is your money and it’s your business how you use it. We offer absolutely clear guidance. We access the best refinancing options. You won’t trip up. If you are ready, so are we. Our Mortgage Advisors are available at (800) 927-6560 to answer your questions or click here to apply online, cash out or not.
The Mechanics of Cash Out
With cash out refinancing you convert equity to cash by agreeing to increase the amount of principal that you owe. Let’s try an example.
- Your home’s current market value is $650,000, against which you owe $210,000 on a 5.25% 30-year mortgage
- 30-year interest rates are trending below 4.25%; 15 year rates are about one percent lower than 30-year fixed rates. A low closing cost or no closing cost refinance will reduce your monthly payment.
- However, your children’s college fund is being challenged. Fees are increasing across the education system. With the twins graduating soon, you need to offset the increase by about $25,000 over four years of college
- Adding $25K to the existing balance of $210K, a new 30-year $235K mortgage in today’s market may yield a payment lower than your current 30-yr. fixed. The budget remains stable and you’ve got a check for $25,000.
- And, refinancing is currently low- or no cost. It’s a no-brainer.
Other Options to Get Cash from Equity
The foregoing example is an ideal scenario for cash out refinancing. However, there are other ways to get the cash. They may be more attractive if interest rate differences are smaller than the example:
A standard home equity loan converts a portion of equity to cash in a separate loan
- Secured with a 2nd mortgage, home equity loans offer interest rates lower than personal bank loans
- Repayment is a fixed term up to 15 years
- Monthly repayment is on top of the current mortgage and needs to fit your ability to repay
- Interest may be deductible
A home equity line of credit or HELOC
- This is usually a variable interest rate loan that taps home equity, secured with a 2nd mortgage
- Pay it down and you can borrow again by simply writing a check. Right now, it can offset college costs. Several years later, it might be used for wedding expenses or a cruise, even a new bedroom set, for example
- The interest rate changes with the market and is typically higher than a mortgage but lower than a personal loan
- Monthly repayment is on top of the current mortgage and needs to fit your ability to repay. There is no maximum payment restriction or pre-payment penalty
- Often, HELOC’s offer interest-only repayment for a period of time. While this reduces the payment (to ease financial problems at a difficult time, for example), eventually the principal has to be paid back
Whatever your motivation is for a cash out refinance, California Mortgage Advisors is here to help you. We genuinely believe that we offer our clients the best mortgages in the industry. We have offered a variety of loans since 1993, which means our Mortgage Advisors have successfully matched tens of thousands of borrowers with loans tailored to meet their needs and unique financial situations. Our Mortgage Advisors are available at (800) 927-6560 to answer your questions or click here to apply online.