It is no secret that mortgage rates have been hovering near historic lows for a long time. These rates have been the fuel for the revved up housing market we have been witnessing for the past year. Home buyers are clammoring to buy the house of their dreams and lock in favorable mortgage rates for the long term. Homeowners are looking to refinance their existing mortgages to decrease how much they owe over the life of their home loan and possibly lower their monthly payments. Some homeowners are looking to take advantage of today’s mortgage rates and do even more than merely save some cash. They have been looking for ways of tapping into their home’s equity and getting some extra cash to improve their lives. Homeowners have been doing this with cash-out refinancing. So, what is a cash-out refinance and why does it make sense for so many?

The Basics of a Cash-Out Refinance

A cash-out refinance is slightly different from a traditional refinance. One thing to keep in mind is that refinancing a mortgage is not rewriting or changing the original home loan. What you are actually doing is taking out a new mortgage that replaces the old home loan. In a traditional refinance, you take out a new home loan for the amount you currently owe on your home. For instance, assume your original home loan was for $300,000, but you have made payments, which brought your principal down to only $200,000. A traditional refinance would give you a new mortgage for $200,000 at whatever interest rate you qualify for. Depending on what your old interest rate was and whatever your new interest rate is, you might save money on monthly payments and on interest over the life of the loan. 

Cash-out refinances are different from traditional mortgages because they take out a new mortgage for more than is owed on the original mortgage. It is called a cash-out refinance because the difference between the amount that was originally owed and is the amount that is being refinanced is given to the homeowner. We can use the example up above to show how this works. If your original mortgage is for $300,000, but now you only owe $200,000, you can do a cash-out refinance for $250,000. The homeowner would then have a new home loan for $250,000, but they would also get $50,000 in cash to do whatever they want with. 

There are a couple of limitations to consider regarding cash-out refinances. First, the interest rate for a cash-out refinance is typically higher than it would be for a traditional refinance. The lender is taking on more risk, so they offset this with a higher interest rate. Second, cash-out refinances are capped out somewhere between 80-90% of a home’s value. 

Why Cash-Out Refinancing is Popular With Homeowners

Many homeowners have turned to cash-out refinancing over the past year because they can and because they are helpful. Homeowners can do it because a vast majority of homeowners are now flush with equity. Home prices have been skyrocketing because of high demand from home buyers and low inventory of available homes. This has put many homeowners in a great position where their homes are worth far more than the amount they owe on their mortgage. This is what is allowing so many homeowners to pursue cash-out refinances. 

The other part of the equation is that homeowners recognize there are a lot of great things that they can do with some extra cash. Some are using this cash to pursue home renovations that they have always wanted to do. This strategy is great because depending on the types of renovations it might actually end up increasing the value of their homes even further. Others use the cash for debt consolidation. Taking the cash from your refinancing to pay down credit card bills or other debt might make sense if the other debts have higher interest rates than on your new mortgage. Still, others are using the cash for vacations, tuition payments, or even new cars. Pretty much anything you can think of doing with extra cash can be done using the money you could get if you qualify for a cash-out refinance. 

Final Thoughts

The cash-out refinancing trend does a good job of emphasizing why it is great to be a homeowner. For many of us, our homes are the biggest asset we will ever own. Some people fear buying a home because they think of it in terms of taking on a lot of debt. However, as you pay off your mortgage you build equity. Equity is an asset and it is an asset that you can use long before your home loan is completely paid off. 

Cash-out refinances might not be a great fit for everyone, so it is always best to speak with a professional mortgage broker. Boston and its surrounding areas have seen property values explode over the past year, so there is a good chance homeowners in our area might qualify for one of these programs. If you are interested in learning more about cash-out refinances or traditional mortgage refinancing options, contact us. The team at Peoples Choice Mortgage is happy to show you some mortgage programs that might be perfect for you.