Posted 07/25/2018

by Gina Pogol

Gina Pogol writes about personal finance, credit, mortgages and real estate. She loves helping consumers understand complex and intimidating topics. She can be reached on Twitter at @GinaPogol.

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Best uses for your mortgage cash-out refinance

apply for a mortgage refinance

Gina Pogol

The Mortgage Reports Contributor

Growing mortgage trend: the cash-out refinance

The cash-out refinance is back.

As home prices appreciate, homeowners have access to increasing equity, and many are putting it to good use.

  • Mortgage lenders usually allow cash out up to 80 percent of the property value, but FHA allows 85 percent and the VA allows 100 percent
  • Cash-out refinances are usually subject to higher underwriting standards, because they are riskier to lenders
  • Cash-out refinances usually carry higher interest rates or fees
Verify your new rate (Aug 18th, 2018)

Mortgage refinancing: 3 methods

There are three forms of mortgage refinancing:

  • Rate-and-term, in which you replace your old mortgage with a new one, and its loan amount is equal to the payoff of the old loan
  • Limited cash-out refinance, which allows you to add the refinance closing costs to your loan balance and refinance with zero out-of-pocket charges
  • Cash-out refinance, in which you pay off your old mortgage plus add to the balance of the new loan, and take that difference as cash at closing
Verify your new rate (Aug 18th, 2018)

Good uses for cash-out refinancing

U.S. homeowners use cash-out refinances for many reasons. However, some are “better” and make more financial sense than others.

Related: The VA Energy-Efficient Mortgage (EEM)

Most mortgages have very long terms, and the dollars you borrow accrue interest over that entire repayment period. So you don’t really want to use the long-term money to finance short-term assets. Using a 30-year mortgage to finance an extravagant vacation is not what most finance professionals would consider a good decision.

Here are some “good” uses of long-term borrowing.

Verify your new rate (Aug 18th, 2018)

1. Complete home improvement projects

You can use a cash-out refinance to fund a home improvement project.

Home improvement projects are often expensive. Adding a master bedroom suite to your home could cost $100,000 or more; remodeling a kitchen could run $60,000 or more; and, remodeling a bathroom may cost $50,000 or more as well.

Related: The FHA 203(k) loan advantages and downsides

There are specialized home loans available from the FHA and VA for home improvement projects geared at improving your home’s energy efficiency, the FHA 203(k) loan and the VA Energy Efficient mortgage, respectively.

For most big-ticket purchases, a cash-out refinance can be a better way to finance.

For smaller projects, a home equity loan or line of credit (HELOC) offers lower costs and is probably a better

Verify your new rate (Aug 18th, 2018)

2. Pay off credit card debt

Cash-out refinances can be an excellent way to retirement lingering credit card debt.

Typically, credit card balances accrue at interest rates of between 14-18 percent. Mortgage debt, by contrast, is available at rates between 3-5 percent. There’s a lot of interest saved there. Payments can come way down, too.

A popular refinance strategy for retiring credit card debt involves paying all open credit cards down to zero, then using the monthly savings to reduce the new loan’s active principal balance.

Related: Debt consolidation mortgage (Do it safely, or don’t do it at all)

In this way, homeowners can save hundreds — sometimes thousands! — of dollars while reducing their overall debt load. A lender can clarify how this could work for you.

The process is called debt consolidation. It only works if you keep credit card balances low in the future, however.

3. Add to or protect your existing investments

A cash-out refinances can also be used to quickly boost to your savings.

Many investments pay better returns than the cost of borrowing against your home.

However, investments that pay higher than mortgage interest rates are typically riskier than fixed or guaranteed income products. Before embarking on this strategy, review your plans with a trusted financial planner.

In addition, investment products can bestow tax advantages, such as with certain retirement plans and with the 529 College Savings program.

If you need cash and don’t want to sell existing investments (for example, in a down market or with an investment that contains a penalty, like retirement savings or CDs), tapping your home equity might be a cheaper option.

A cash-out refinance can help you to diversify your holdings; and, to protect against a housing market downturn.

Verify your new rate (Aug 18th, 2018)

4. Buy an investment property

Cash from your primary residence can be applied toward the purchase of another property, such as an investment (rental) property.

As an asset class, real estate can build wealth quickly because you can leverage your purchase — for instance, control $500,000 of real estate with a down payment of, for example, 10 percent ($50,000). A 5 percent gain on a $500,000 home creates $25,000 in wealth. That’s 50 percent of the original investment.

Related: Cash-out refinancing your investment property

Conversely, a 5 percent gain on $50,000 in stocks creates just $2,500.

This is a great way to expand your real estate portfolio.

In many cases, homeowners take a cash-out loan on their home and buy a rental with cash. When they want to invest again, they do a cash-out refinance on their investment property to buy another one. The result is a robust collection of rentals that are producing ongoing income.

5. Buy a second home

If you’re not into being a landlord, but want another home, you can cash-out your primary residence to buy a second home (vacation property).

With as little as 10 percent down, you can purchase a vacation spot for your family. No booking hassles, no sky-high hotel prices.

Related: Getting a mortgage on a second home

Today’s home values are high, making it easier to raise enough down payment cash to buy a second home.

6. Backstop a business against cash-flow emergencies

If you have an existing business or a start-up, a cash-out refinance can serve as a cheap source of emergency capital. Remember that saying that banks only lend to you when you don’t need it? So it may be smart to cash out your equity before your business experiences any cash flow glitches.

Your interest rate is also likely to be better when your finances are intact, your income stable, and your credit rating acceptable.

What are today’s cash-out refinance mortgage rates?

When mortgage rates drop, U.S. homeowners get chances to refinance for lifelong savings. However, when mortgage rates drop at the same time home values rise, homeowners can “cash-out” for a variety of excellent purposes.

Take a look at today’s real mortgage rates now.

Verify your new rate (Aug 18th, 2018)

Gina Pogol

The Mortgage Reports Contributor

Gina Pogol writes about personal finance, credit, mortgages and real estate. She loves helping consumers understand complex and intimidating topics. She can be reached on Twitter at @GinaPogol.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

2018 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)