Frequently Asked Questions
What is a Cash-Out Refinance?
When borrowers refinance their mortgage, they may have the option to draw additional funds for their personal use. This is called a cash-out refinance. It allows borrowers to tap into their home equity while also changing the rate and term of their existing mortgage.
As an example, if a borrower currently owes $200,000 on their mortgage, and their home is worth $500,000, they could potentially take out $100k cash and have a new loan balance of $300,000.
Should I Refinance with Cash-Out, or apply for a Home Equity Loan?
Take a look at your current loan and financial situation, as well as your financial goals, when considering a cash-out refinance. If you have a high interest rate on your current loan you might want to consider a cash-out refinance. You may also want to look into a cash-out refinance if your home has gained significant equity and you want to eliminate mortgage insurance payments. If you currently have a low interest rate and no mortgage insurance payments, you may want to consider a Home Equity Loan, since it does not impact your current loan terms.
When should I Refinance?
Depending upon current loan terms, monthly payment amounts between the original loan and the cash-out refinance may not change much if interest rates are favorable. If refinance rates are not favorable, another option to tap into home equity is to borrow funds with a Home Equity Loan. Talk to a loan specialist to help determine which option is best for your needs.
Another reason to consider a cash-out refinance instead of a Home Equity Loan to tap into home equity, is if your credit score has gone up significantly, or if you are paying mortgage insurance, or if you have a higher credit score than when you first got your mortgage. Each of these factors may lower your refinance rate.
What type of loan should I get?
This is one of those mortgage questions that doesn’t matter much until rates increase. With low rates most people choose a 30-year fixed rate mortgage.
However, there are a lot of home loan options, including different length fixed-rate mortgages and adjustable-rate mortgages (ARM), along with conventional loans and government loans, such as FHA and VA.
For example, a 5/1 ARM might come with an interest rate 1% below a 30-year fixed, and it’s still fixed for the first five years. If you’re comfortable with an ARM, you can explore the many options available.
If you decide you want a fixed-rate home loan, you can determine whether a shorter-term option like the 15-year fixed is a better option. Also consider the FHA vs. conventional pros and cons to ensure you’ve covered all your bases if trying to decide between those two loan types.