How To Guide: What Is A Cash Out Refinance?
When you obtain a mortgage loan, you immediately begin making payments on it to own your home outright. Mortgage loans have some of the longest available terms in the world of lending, with some lasting as long as thirty years! Because those terms can be so long, many people look toward changing their loan terms at some point while they’re paying it off. One way some choose to do that is by using a cash-out refinance, and while it’s a great tool for many homeowners, for others, it’s not the ideal situation. What is a cash-out refinance right for you, and how do you even begin to get one? This guide can help you understand all of the facets of this type of loan.
What is Refinancing a Home With a Cash Out Loan?
When you refinance a home, you change the terms of the original mortgage loan. When you refinance a home with a cash-out option, you convert the equity that you’ve built up in your home to cash. You take out a new mortgage that is higher than your previous mortgage loan, and cash in your pocket is what remains. You’re taking money out of a mortgage loan. Essentially, lenders use the term cash out meaning to access that money you’ve built up in your home as cash.
How To Refinance a Property and Get Cash
What does cash out mean when it comes down to the process itself? As you pay down your mortgage loan, you build up equity in your investment over time. Equity is essentially the difference between the value of your home and the total balance of your loan. When you first take out a mortgage, you have very little equity in your home. As you pay the balance of your loan, though, you end up with quite a bit of equity in your home. When you get a cash-out to refinance, you use your home as collateral to take out a mortgage for a larger amount – one closer to the value of your home – than what you owe right now. You’re essentially cashing out the equity in your home.
Typically to make this process happen, you simply find a lender that specialises in cash-out refinance property loans. The lending company will then take a closer look at your current mortgage and terms, the balance you would need to pay to complete the loan, and your overall credit profile. Then the company makes an offer. If you’re happy with the way the offer comes back, you get a new loan that repays your previous one and locks you into a new monthly instalment plan. The lender then provides the remaining money as cash for you now.
What Are the Benefits of a Cash-Out Refinance?
Several great benefits come with a cash-out refinance. One of the biggest, though, is the benefit of any refinanced mortgage – it could mean a better deal on your home loan. Often a refinance of any kind means a new loan at a much lower rate than your previous mortgage. You’ve had a chance to prove yourself to a lender, and that proof may end up meaning that you get better overall terms on the new loan, which means you’ll end up paying less for your mortgage over time. A refinance also typically means a chance to negotiate a new set of terms, and that could be beneficial if the way your income stream works have changed, thus you need to make payments differently. A cash-out refinance has one other obvious benefit, though – the ability to release the equity you’ve built up in your home to cash. That alone can be a motivator for many people.
Are There Any Drawbacks to a Cash-Out Refinance?
For all of the benefits a cash-out refinance can provide, there certainly are some drawbacks as well. First, when you switch to a new mortgage deal, you may end up paying early repayment fees from your old lender, and that may cost you more than you’d initially expected. You may also end up paying administration fees with the new loan, and all of those fees are going to add up. They may get high enough that it offsets the move to a cheaper rate. It’s a bit like cash in cash out a loan because you’ll pay in to get your money out.
You may also pay a lot more interest on your loan depending on what you do with the money. For example, if you choose a cash-out refinance so that you can consolidate your debts into a short-term agreement, you end up paying back a lot more interest on those debts than you otherwise might have.
Keep in mind, too, that securing other debts – like credit card debts and other kinds of loans – against your property could mean that if you fail to keep up with your repayments, you may end up having your home repossessed in the long run.
Remortgaging your home isn’t a fast process, either. It can take weeks depending on your circumstances, so if you’re looking for a cash-out option that’s quick, this is not the way to go.
What Can You Do with the Money?
If you do choose a cash-out to refinance, you may wonder exactly what you can do with the money you release from the equity in your home. The simple answer, though, is absolutely anything. If you choose to pay off other debts and consolidate them under your mortgage loan, that’s an option. You could also choose to use that money to renovate your home, add solar panels, or generally make it more efficient. Additionally, it is possible to use the money to fund a big upcoming expense, like your child’s university education. Typically, there are no limits on how you spend the money you borrow, so you can truly decide how the equity you’ve released through this kind of loan can best benefit your life.
What Are Your Other Refinance Options?
A cash-out refinance is not the only type of remortgage that is available from UK lenders. The remortgage definition just means changing the terms of your loan, so buyers have several different options if they want to take advantage of the benefits of refinancing their loans. The simplest type of refinance is called a rate and term refinance. It’s a bit like a mortgage renewal. The goal of this kind of loan isn’t so much to release the equity you’ve built up. Instead, it’s to take advantage of changes to lending since you originally took out your loan. Typically with this kind of loan, you’re looking for a lower overall interest rate or a shorter (or longer) term for your loan. Nothing else about your loan changes.
Here’s a quick example of how this kind of change to the terms of your mortgage works. Say, for example, when you purchased your home, the interest rate was 5 per cent. Over time, though, those rates have gone down, and now, the standard interest rate for a loan is 3 per cent. It makes sense, then, to take advantage of that shift. You can choose to change the rate, the term, or both. If interest rates have dropped significantly, you may choose to move from a 30-year mortgage to a 15-year mortgage. You’ll end up with the same overall payment amount, but you’ll pay less over time.
Keep in mind that you can change the rate and term when you do a cash-out refinance loan, too, but the entire goal of a cash-out loan is to get the difference of the loans in cash itself. It’s only possible if you have plenty of equity in your home, and the cash will be paid to you as soon as you close on the loan. Cash-out loans overall, though, tend to come with higher interest rates and costs, so you may not get the great deal that you would if you were just doing a rate and term refinance.
Are There Other Ways to Release the Equity in Your Home?
If you’re looking for a great way to release some of the equity in your home, but it doesn’t make sense to do a cash-out refinance, there are other things you can do to access those funds. The best way is to do a home equity loan. When you do a cash-out refinance, you eliminate your current mortgage and put a new one in its place. When you take out a home equity loan, though, you take out an additional mortgage on the property, leaving the original one in place. Essentially, you have a second creditor on your home.
There are some benefits to accessing equity in your home this way. The closing costs on this kind of loan are generally fairly low – often lower than those for a cash-out refinance. If you want a solid sum for something specific, like a home improvement project, a home equity loan may make sense. If, however, you plan to stay in the home over the years to come, a cash-out refinance is more likely to make sense, because you’ll get a better overall deal as well as the cash you need to move forward.
Keep in mind that all of these kinds of loans mean one thing – creditors have access to your home. If you fail to repay the balance of the loans on time in any of these cases, you risk losing your home to foreclosure.
Refinancing a Property if You Have Bad Credit
You can still get a cash-out to refinance if you have bad credit, but as with your original mortgage, you’ll need to expect to pay higher interest rates on the loan itself. Some cash-out refinance products are designed specifically for individuals with poor credit scores, and many lenders specialise in offering these products. If you plan to consolidate your debt with a cash-out refinance loan, this type of product could help you immensely in the long run, as it may boost your credit score when you pay off some of the outstanding debts you’ve accumulated.
Should You Do a Cash Out Refinance If you Want to Invest In Another Property?
Thinking you’d like to add another property to your portfolio and you want to do a cash-out refinance to make that happen? That’s more than possible. As long as you qualify for a remortgage, and it will give you enough money to pay for the other property, that’s a great way to spend the extra money. You’ll need to work closely with your lender, though, to show them that you can afford to pay for the refinanced costs in addition to any other money you need to pay for the new property itself.
Whether you’re looking to purchase a property that you can let or you want a second home, a cash-out refinance can help you get the money you need to make that happen. Remember, though, to do your research carefully. When you remortgage your own home to access the equity in the property, you’re putting your home up against the debt itself. If your second property deal doesn’t go as well as you’d expected, you could lose both properties, which could create quite a dangerous situation.
Should You Do a Cash Out Refinance to Pay Off Debt?
Many people choose to use the money they’ve released from their home’s equity to pay off debts they’ve accumulated, and often, it can be a really good idea to do so. If you’re buried in other debts, using a cash-out refinance loan can help you immediately repay some of those debts, often at a much lower interest rate than you had with your other lenders. More than that, though, it gives you a single payment to make month after month instead of dealing with various lenders from the past. Additionally, it may improve your credit rating overall because it can help you pay off those other debts so instead of lots of smaller loans on your credit report, you’ll just have the mortgage loan itself.
It’s not without downfalls, though. First, you may end up paying more toward your debts than you’d initially intended because of the longer terms on mortgages. Additionally, you secure those debts against your house, so if something happens and you can’t make your mortgage payment, you could lose your home.
How Does Cash Out Refinance Work If You Own Your Home Outright?
If you own your home outright, you can still choose to do a cash-out refinance. In the same way, you would approach a lender if you already had a mortgage, you approach a lender with your home as collateral. You’ll need to tell the lender what you’d like to do, and the bank – using several different criteria – will then decide whether or not to loan you the money you’ve asked for. The amount you can borrow is dictated by the home itself. You’ll need to show proof that you can repay the loan – like the last three months of bank statements, your latest P60, and three months of payslips. The bank will also typically send out a surveyor to confirm the overall value of the property.
Once you’ve completed the application and the lender has decided to grant you the mortgage, the loan amount is given to you in cash. Keep in mind, though, that if you fail to make the repayments on this loan, you could end up losing your house in the process.
Should You Use a Broker to Refinance?
Just as many people use a mortgage broker to initially take out their home loan, you can also work with a mortgage broker for a cash-out refinance loan. Not everyone should work with a broker for this type of loan, though. How do you know who should and should not work with a broker? First, think about whether you want to stay with the same lender. If so, you probably don’t want to work with a broker. If, though, you’re looking to save and get a better loan in the process, it might be a good idea to work with a broker. If you choose a whole of market broker, he or she will take a closer look at the terms of your current loan, then look around for the best mortgage deals that will help you achieve your goals (lower rates, different terms, and additional cash for the equity in your loan). It can be essential to work with a mortgage broker in certain situations. For example, if you’re self-employed or you have bad credit, you may find some lenders are unwilling to work with you on a cash-out refinance loan. A mortgage broker, though, can locate those lenders who are willing to work with you.
Generally, the goal of working with a mortgage broker over a single lender is that they can search the entire refinance mortgage market for you, comparing rates, terms, and conditions as they go, so you get immediate access to a loan with the best possible terms. Essentially, a broker is like a middleman full of information about who has what when it comes to mortgage loans.
In exchange for the services a mortgage broker provides for you, you pay a fee for their services. That fee calculation can vary from company to company, but typically it’s either a percentage of the overall loan amount or a flat rate. Some brokers are paid in commission by the mortgage lender once you transmit your application.
If you do choose to work with a mortgage broker, you’ll need to ask several questions to make sure you have the right professional on your side. First, find out whether you’re dealing with a whole market broker. They have access to the best rates and terms across the lending market. Second, find out what the overall cost of refinancing your property might be (including your broker’s rate). You may also want to ask about the process itself. Find out not only how long it will take your broker to find the right mortgage, but also how long the overall refinance process tends to take with this particular broker. You may also want to ask about qualifications and experience just to be sure you’re getting a professional you can trust to handle this very important home loan shopping experience.
Making the Choice
If you think a cash-out refinance might be the right step forward for your home, the time has never been better to contact a lender.