Determining if a Cash-Out Mortgage Refinance is Right For You, Part 1

There are several different major processes that may take place within the life of a given mortgage loan, and one of the most common and well-known is refinancing. Referring to any case where you alter or adjust your mortgage rates, insurance payments or other restructuring areas, there are several distinct types of refinancing available depending on your needs and financial situation.

At Altius Mortgage and our partners at Mortgage Ogden, we’re here to help with all your mortgage refinance questions and needs, including one format that differs from other refinancing methods in a few major ways: Cash-out refinancing. This two-part blog series will go over everything you need to know about cash-out refinancing, including how it differs from other types, some of the common scenarios where homeowners go this route, and some basic tips on when the right time for a cash-out refinance might be.

Purposes of Refinancing

For starters, it’s important to understand that there are varying different purposes for refinancing a home loan. The most common here is to lower the interest rates or payments you’re making based on changes in the market – if you bought at a time when rates were high and they’ve since gone way down, you might be able to get a far better deal by refinancing. This general field is known as “rate-and-term” refinancing.

In other cases, refinancing is done to remove private mortgage insurance, which is paid to lenders until you have enough equity built up in your home to cancel it. Some also use refinancing to consolidate or replace existing mortgages.

How Cash-Out Refinancing Differs

Cash-out refinancing, on the other hand, involves converting your built-up home equity into actual cash that’s paid to you. Essentially, it features you taking out what’s really an all new mortgage loan, one for a higher amount than what you currently owe – and this extra amount on the loan is simply paid to you in a lump sum. The additional amount covers your equity, so it will vary depending on how much you’ve built up (you don’t have to use all of your equity during a cash-out refinance, however, and there are generally limits on how much you can use).

Interest Rates and Proper Timing

Now, homeowners want to be in the right situation if they’re going to consider a cash-out refinance. For instance, if you’re using the cash-out as a “bailout” of sorts for imprudent financial decisions you’ve made – and especially if you aren’t committed to improving these overall finances moving forward – then this might not be such a great idea. Using a cash-out refinance as a temporary Band-Aid before returning to poor financial practices will just kick your problems down the line, where eventually you’ll have to face them in larger and more imposing ways. Cash-out refinancing can be used to pay down debt, but this should only be done if you have a robust future plan in place as well.

For more on cash-out refinancing, or to learn about any of our mortgage rates or other home loan services, speak to the staff at Altius Mortgage today.