We all heard of cash-out refinancing, but what is this and how can you benefit from it? Simply put, the cash out refinance will replace your current mortgage with a new mortgage. In addition, the equity from your home will be automatically converted to cash, and then it will be added to the mortgage balance. The reason you want to do this is because the loan to value of your home is increased and the term is also reset. It’s the best of both worlds, and it totally offers the benefit and quality you want in a single package. With the cash out refinance, you get to tap into the capital reserves and you can use those the way you want. The interest rate may not be a big deal. Have your lender show you why the lower rate may not make sense in some cases. Having a higher rate but getting more cash may be more beneficial in the short term. You should analyze your plans and run a BEP to evaluate the best options for you.
Does it make sense to use a cash-out refinance?
There are some things you have to keep in mind if you want to refinance and pull out equity. You do need to study the loan to value calculation, and that amount has to show that you have lots of equity. After adding the closing costs and new debt to the loan balance, the LTV amount needs to be 80% or less in Texas.
But you also have to meet other things such as the loan eligibility requirements. The only type of loan for a cash out refinance are jumbo loans and conventional loans which have different requirements on their own that can either focus on the property type, transaction type or the borrower credit score, depending on the situation.
You also have to consider the closing costs. These can be up to 6% of the principal, and they include the title, inspection, appraisal, origination fee, etc. You can either roll these in the principal balance, or pay them upfront or have the lender pay them. But if you choose the latter case, then the lender will require a higher interest rate to cover those costs. This is called over-par pricing.
Are there any cash out refinance loan limits?
Of course, you will have to deal with some limits that will help prevent any problems. The best way to determine the loan limit for a specific area is to look them up HERE.
Other things that you might want to know
A lot of people don’t know if the proceeds from the cash out refinance are taxable or not. Thankfully, the cash out refinance proceeds are not taxable because they are not considered income. Still, it’s a good idea to talk with a finance professional just to be sure and ensure that there are a no problems.
There are some cash deductions when you opt for the cash out refinance, but the IRS only allows you to deduct interest up to $1 million in mortgage debt or $100000 for mortgage debt used for other reasons such as paying college debt. Again, it’s important to check with the local CPA as he/she will know the current rules and what applies in your particular situation.
Thankfully, you can easily cash out and refinance a rental property. The reason is simple, investment properties are eligible for the cash out refinance program, but the LTV limit will vary based on the loan program that you opt for. Which is why you need to figure out what system works best for you.
You will notice that some programs require a property appraisal, others not so much. But this might be necessary, and that’s the reason why you want to prepare for such an appraisal, just to be safe.
It’s also important to note that a borrower needs to wait around 6 months after closing a purchase until he can cash out on the equity. There are some exceptions, however, for the most part, these are applied in very distinct situations. You might not be able to access those, which is why you need to wait around half a year until you can cash out.
The fact that you can use the cash out money on anything you want is a very interesting thing. However, you do have to realize that stuff like home improvement or investments might be tax deductible in your area. So while you can use that amount of money you get from the cash out refinance on anything you want, there are some advantages if you go with a home improvement project for example. It’s not rush with such a project, but you have to know what you are getting into before you proceed.
Cash-out refinancing is great for home improvements
The primary reason a lot of people go with a cash-out refinance is that they want to opt for home improvement. In this case, a refinance makes a lot of sense. If the new mortgage has a lower interest rate and the term is spreading out payments, you have enough money to tackle even the larger scope remodeling or home improvement processes.
It allows you to pay college debt
Education is known for being very expensive. Which is why most people use a cash-out refinance and end up paying college debt a lot easier. It makes a lot more sense to use a refinance option to eliminate debt. You can build up home equity, and that can help you a lot. The cash-out refinance is a wonderful financial move because the home loan comes with a lower interest rate when compared to the regular student loans. And the mortgage interest is deductible. That’s why it makes a lot of sense to do student write-offs here, as you can repay those debts adequately and without any major worries. That’s a huge factor to consider.
A mortgage will carry less interest when compared to other types of debt as time goes by. And mortgage interest is tax deductible. That’s why it makes a lot of sense to consolidate everything into a single debt. You can pay off lots of debts all thanks to mortgage debt consolidation, such as auto loans, credit card debt or even installment loans. You are always in control; the idea is to know what you are getting into and adjust or adapt everything in a professional manner. It’s never going to be easy to find the right approach with this, but the ROI has to be extraordinary, so try to consider that as much as you can.
Believe it or not, cash out refinance can be very good for paying off medical expenses. As time goes by, you can deal with accidents and other issues that require medical attention/intervention. Those things can be costly, which is why you have to do everything to tackle those medical expenses the best way that you can. When you build equity with your mortgage via cash-out refinance, it’s a lot easier to repay those major medical expenses. This is a very simple, professional way that you can use to deal with this type of problems. All you have to do is to figure out what system works for you here and tackle it the right way to obtain the best results on the market.
There’s no denying that elderly care can be extremely costly, which is why you need to have some money put aside for taking care of your parents. The cash-out refinance can help pay for these expenses. You can also go with a reverse mortgage, as these tap into the home equity and seniors also get to keep their home, which is exactly what you need from stuff like this.
Settling a divorce
This type of situation can be heartbreaking, but at the same time it puts a financial strain on both spouses. Which is why you need to use the cash out refinance to divide the equity. Then the proceeds are split, but only the person that no longer lives in the house will receive everything since the other spouse gets to keep the home.
It’s very important to talk with your CPA as he will be able to tell you what happens in your particular situation. It can differ based on the interest rate that you get from the home loan, the number of monthly payments you make before the tax season and so on. You should always look at your options and then figure out what works for you and what doesn’t. Ideally, you want to avoid rushing into any project like this and instead focus on the essentials. Most of the time a cash-out refinance will be very helpful, but since you increase the mortgage balance by the amount of debt you pay off, you can end up with an increase in monthly mortgage payments. Make sure that you study every option to ensure that you benefit from the cash out refinance, if that’s the case then you should go with such an approach!