Home ownership has a long list of benefits. One of the biggest benefits of owning a home is the fact that you build equity in your home with every mortgage payment you make. Additionally, a rising real estate market can accelerate how much equity you build in your home. A homeowner can do a cash out refinance which allows them to tap into the equity in their home. What is a cash out refinance, and why should you care? We’ll cover that in greater detail below, and include a case study from a client we recently helped.
What is a cash out refinance? Similar to a home equity line of credit, a cash out refinance allows the homeowner to tap into the equity in their home to pay for other life expenses. Perhaps the homeowner needs to pay for a medical procedure, purchase a car, pay school tuition or pay for a home renovation. It doesn’t matter, that equity is yours and can be used! However, unlike a home equity line of credit, a cash out refinance is just one single loan. The easiest way to understand this is to view an example. Imagine the following:
A cash out refinance is when the homeowner uses a new mortgage to pay off their existing mortgage + the amount they borrowed in cash. However, the new loan amount cannot exceed 80% of the appraised value of the home. For example, if your home is appraised for $400,000, your new mortgage on a cash out refinance cannot exceed $320,000.
Continuing on the above example, if the current mortgage had $180,000 in outstanding payments, and you can secure a new mortgage for $320,000, that means you can pull out $140,000 in cash to use as you please!
Why would anyone want to have a new mortgage for $320,000 when they only owed $180,000 on their previous mortgage? There are numerous reasons why! Here are some common options:
Below we’ll review an actual case study from a client we recently helped - which we’ll call Cynthia for this example.
Cynthia originally purchased her home for $448,500 in January of 2018, and initially put 15% down. She took a loan for $381,225, and her interest rate was 3.875%. Her total monthly mortgage payment for principal and interest was $1,793.
The rising real estate market helped appreciate her home value, which is now $590,000! Additionally, her outstanding loan amount has decreased to $356,000 as she has been paying her mortgage every month since January of 2018.
Cynthia wanted to do a cash out refinance for numerous reasons, which we’ll touch on below. Cynthia obtained a new mortgage for $442,500 at a 2.99% interest rate - which is still available for borrowers with strong credit! Her new principal and interest payment is $1,863, an increase of $70/month. However, she received $83,000 in cash after all closing costs.
What did she do with that cash?
When it's all said and done, Cynthia’s monthly mortgage is $70 more per month, however, Cyntia is saving $729 by no longer needing to pay her solar panel debt or student debt. The total monthly savings is $659 or $7,908 a year!
One of the biggest benefits homeownership provides is the fact that homeowners can use the equity in their home to pay for other life expenses. As a renter, you will never be given this option! The current real estate market is primed for cash out refinancing deals. The interest rates are very low, and home prices have surged tremendously in the last 12-20 months. Take advantage of this time and consider using your cash proceeds to pay off other outstanding debt or renovate your home!
If you have any mortgage related questions, please call/text/email anytime. I’ll be more than happy to help you!
Mike McCarthy
Senior Loan Officer
(617) 620 9175 MikeMcCarthyteam@Leaderbank.com
Lender NMLS# : 449250
MLO NMLS# : 176640
Boston | Dedham |
Marblehead