If you own some type of investment property, like residential rental property, you may want to consider what is known as cash-out refinancing. Through this article you are presented with a basic, essential overview of the ins and outs of cash-out refinancing.
Cash-out refinancing can provide you with a number of financial and other benefits. This particularly is the case when contrasted with a traditional second mortgage.
What is Cash-Out Refinancing?
In the most basic of terms, cash-out refinancing is a loan that replaces the original loan. Cash-out refinancing is an alternative to obtaining a second mortgage on a property. You have the ability to obtain a cash-out loan in an amount higher than the outstanding balance on the existing loan on the property. As is discussed shortly, this is contingent upon the equity available in the property.
When Cash-Out Refinancing Becomes Possible and a Solid Alternative
Cash-out refinancing typically occurs in a situation in which a portion of the original mortgage loan has paid down. In addition, the market value of the property has increased for another reason.
First the market value of the property may have risen because of home improvements you’ve made. Second, the market value of the property may have increased because of a strong overall real estate market. Finally, property improvements and a strong prevailing real estate market may be at play.
Cash-Out Refinancing and Your Current Lender
Your existing lender may be interested in providing you a cash-out loan. This particularly is the case if you have an established, positive relationship with your existing lender. In other words, the first stop when considering cash out refinancing is your existing mortgage lender.
The Downside of a Second Mortgage
As mentioned a moment ago, cash-out refinancing can be a more favorable alternative to a traditional second mortgage. If you elect to get a second mortgage, the interest rate on that loan will be higher that what is attached to cash-out refinancing. This is the case because the lender is at greater risk with a property that has both a first and second mortgage.
How Cash-Out Refinancing Works
Assume that you have an outstanding balance on your original home mortgage for $200,000. Because of previous payments made on the existing mortgage combined with improvements and a strong real estate market, the value the property is $270,000.
With cash-out refinancing, you obtain a new loan that can be in an amount beyond the balance on the existing mortgage loan. For example, you can obtain a loan for $250,000. The bulk of the new loan pays off the existing mortgage. The additional funds from the second mortgage can be utilized for additional improvements on the property.
You can also invest the balance. Many people take the investment course and are able to obtain a higher rate of return on the investment over and above the interest rate on the cash-out refinancing.
You can also use the balance of the proceeds from the cash-out loan for other purposes. For example, perhaps you have a child heading off to college. You may have other outstanding bills or credit accounts you can pay off, essentially consolidating them via cash-out refinancing.
In conclusion, you may want to consult with a financial planner, mortgage specialist, or real estate professional when contemplating the possibility of cash-out refinancing. While you’ve been presented a general overview of the ins and outs of cash-out refinancing, you need to make sure that all of your questions are answered and you fully understand the pros and cons of this and other types of refinancing options that are available to you.