Cash-Out Refinance: Benefits of Mortgage Refinance 2022

cash-out-refinance

To better understand Cash-Out Refinance, we need to know about its terms like Mortgage Loans, Refinancing, etc. There are many definitions out there on the internet explaining Cash-Out Refinance. I personally had a tough time understanding. So I will try to be as simple and specific as it can be.

What Is Mortgage Loan?

A mortgage is a type of loan from a bank that is given to an individual or any borrower to purchase a home.

When a bank approves a mortgage for a home, the collateral for the mortgage is the home itself. This means that if the borrower fails to make the monthly payments for the mortgage, the Mortgage lender can sell the home and retrieve its money.

What Is Refinancing?

The term refinancing or in short ‘refi’ refers to the process of replacing an existing loan or mortgage with a new loan that offers better terms than the previous. The purpose of refinancing is done to reduce interest rates, repayment tenure, or changing loan programs.

You can refinance any Debt be it a home loan, auto loan, personal loan, or any other.

When To Refinance?

  • When a lender is offering lower interest rates than what you have on your existing loan, it’s better to refinance to get the benefits of reduced interest rates which will result in lower monthly payments for the loan.
  • If your credit score has improved and also your financial conditions, so you may want to refinance your existing loan reduce the term of repayment to pay it off sooner.
  • You can also increase the repayment duration of the loan by increasing the term of the loan. But keep in mind that increasing the term of the loan may also result in you paying more interest costs.
  • If your previous loan was a variable-rate loan, which causes your monthly payments to fluctuate as the rates increases and decrease. You can refinance it to a fixed-rate loan which results in predictable monthly payments.

Read more.

What is Cash-Out Refinance?

Now that we have some insights about Refinance and Mortgage loans it’s time to get into Cash-Out refinance.

A Cash-Out Refinance replaces an existing mortgage with a new loan that offers more than your previous mortgage balance. Means more than what you owe on your previous loan and the difference between the new loan and the existing loan is paid to you in cash.

Let’s understand it with an example for better clarity.

Let’s say you want to buy a home worth $100,000, But the problem is you don’t have enough cash to buy that home, so what you do is find a bank that offers a mortgage loan with good terms that suits your interest.

The bank provides you a mortgage loan of $80,000 and you put $20,000 as the down payment. Remember, the collateral for this mortgage is the home itself.

The Loan-To-Value ratio for this mortgage is 80% of the appraised value of the home.

To calculate LTV , LTV ratio =MA/AHV ( MA– Mortgage amount, APV– Appraised home value).

So, now lets make some things clear,

Your Home Value = $100,000

Mortgage Balance = $80,000

Equity you own in Home = $20,000

Now we assume you paid monthly payments on time and your mortgage balance reduces and equity increases.

After making monthly payments for your mortgage loan your equity increases to let’s say $30,000 and the mortgage balance stands at $70,000.

Now, let’s say you want some cash for any home renovation, kids’ tuition fees, medical emergency anything where you feel the need for extra funds.

That’s where Cash-Out Refinance comes into play.

Through Cash-Out Refinance you can access the equity you have build in your home.

When taking out cash-out refinance, remember the new mortgage loan should be greater than the amount you owe in your previous mortgage and the remaining fund will be paid to you in cash.

Let’s make it clear ,

Mortgage balance = $70,000

Home equity = $30,000

The new mortgage should be bigger than $70,000 .

Let’s say you needed $20,000 of funds, So you found a new lender who is providing you a good deal for a Cash-Out Refinance on your previous mortgage and offering you a mortgage of $90,000.

After refinancing your previous mortgage the equation is as follows:

New mortgage loan = $90,000

The new mortgage loan clears the previous mortgage balance of $70,000 and the remaining $20,000 is paid to you in cash. You can use them in any possible way you can;)

New Mortgage Balance After Refinancing = $90,000 ( $70,000 previous mortgage + $20,000 cash paid to you).

Cash-Out Refinance explained in Hindi

  • Explaining Cash-Out refinance in Hindi for our audience located in India.

Link to video https://www.youtube.com/watch?v=hP69FTe8aLc&t=223s


When Does Cash-Out Refinance make sense?

Cash-out refinance is a great tool to access the equity that you have built in the home. It can help in getting some cash for further investments or any other spending.

Can cash-out refinance be used for anything?

The banks have no restrictions on how you spend the money you get after the cash-out refinance, as long as you are paying monthly payments on time.


Tags-

closing costs, home improvement, equity lines of credit, life of the loan, loan terms, cash out refinancing, save money monthly, mortgage payments, credit score, loan amount, rate and term refinance, home loan, credit cards, home equity lines, personal loan, equity in your home, terms and conditions, home equity loans, monthly payments, mortgage lenders.

Links- https://affiliatesparadise.com/web-stories/cash-out-refinance/

https://affiliatesparadise.com/web-stories/cash-out-refinance-in-hindi/

Newbie blogger trying to put maximum information out there to help folks get better at what they do. not a newbie in the stock market mind you ;).  Reach out to me at the below links.

Leave a Reply

Back To Top