February 2023

The lowdown on cash-out refinancing

When you think about mortgage refinancing, you're likely thinking about rate-and-term refinances-where a homeowner replaces their existing mortgage with a new one that has a lower interest rate and/or different terms (changing from an adjustable-rate mortgage to a fixed-rate mortgage, an FHA to a conventional loan, etc.).

A cash-out refinance, on the other hand, allows you to turn your home's available equity into a lump sum of cash at a fixed rate.

What are the eligibility requirements?

Different mortgage lenders have different requirements. The typical ones include a minimum credit score, a maximum debt-to-income ratio, having owned the home for at least six or twelve months, and at least 20% equity in your home.

Why would I do a cash-out refinance?

The key element of cash-out refinancing is getting the lump sum of money. It's worth it to do one if you need that money to purchase another property, to renovate your existing home, to consolidate debt,Footnote1 to cover education expenses, etc.

It's not worth it to do a cash-out if you want to buy an expensive car or something else that will depreciate in value; in that case, it would be better to just save up for that purchase.

What are some pros and cons?

The main pro is that you're putting your equity to work for you. Your home's equity may appreciate in value over time just from the value of the property increasing, but if you take the equity and purchase a rental property, for instance, your equity can generate income for you each month.

The main con is that you're increasing your debt. The equity that you're taking in the cash-out will need to be repaid along with the rest of the mortgage.

Are there any alternatives?

If you don't need a large sum of money but still need to access your equity, a home equity line of credit (HELOC) would be a better option for you because it allows you to draw a line of credit and only pay interest on what you use.

So, if you needed $15,000 to pay off credit card debt, a cash-out refinance wouldn't be the right choice for you because you'd be paying interest on the entire amount of your refinance to be able to access that $15,000. A HELOC would allow you to pay down that debt and only pay interest on the $15,000 you're actually using.

Is now a good time to do a cash-out refinance?

That depends on your situation.

In general, when interest rates are high, refinancing is not ideal. In most cases, you'll want to refinance into a lower interest rate, not a higher one.

But there can be financial upsides to refinancing even when you end up with a higher interest rate. Investing in a rental property, for instance, is one example where the benefit may outweigh the cost of a higher interest rate. Paying 1% more on your mortgage may make more sense financially when you've invested in a rental property generating hundreds or thousands of dollars in income for you each month.

As with any financial decision, take your time, do your research, speak with your financial planner or accountant, and make the decision that's best for your goals.

A note from your lending specialist

If you're ready to apply for a cash-out refinance or HELOC, I can help you review your options and get the funds you need.

1 The relative benefits of a loan for debt consolidation depend on your individual circumstances. For example, you may realize interest payment savings by making monthly payments towards the new, lower interest rate loan in an amount equal to or greater than what was previously paid towards the higher rate debt(s) being consolidated.

MAP5411355 | 01/2023