Many homeowners are looking at the equity they have built in their home and wondering how to take advantage of that increase in value. The truth is, as a homeowner, you have several options to make the most out of your new home value with a refinancing, whether it’s taking cash out of your home or getting a loan on better terms with your new lower loan-to-value.
Cash-Out Refinancing
Cash-out refinancing allows a homeowner to replace your existing home loan with a larger home loan, allowing the excess cash to be used for virtually any purpose, including build your children’s college fund, home remodeling, paying off any other debt that may have accrued or any other financial goal.
For example, if your remaining balance on a loan is $140,000 and your home is currently worth $300,000. You can take advantage of today’s home equity of $160,000 and today’s low rates with a reasonable $240,000 loan. You will have a new mortgage with an 80% loan to value ($240,000 divided by $300,000), and because you will still have ample home equity after the refinance, you’ll get a very beneficial interest rate from your lender. Most importantly, you’ll have nearly $100,000 of cash to put towards your financial goals. Please note that borrowers are required to play closing costs for a refinance (such as a new appraisal) so the final amount will not be exactly $100,000 in this example.
Refinancing to Obtain Better Loan Terms
For borrowers not interested in increasing the size of their loan balance, refinancing can still be the right financial decision. Many borrowers buy homes with as little upfront costs as possible. Homes purchased with small down payments (i.e., less than 20% down) often have loans that with higher interest rates as well additional monthly maintenance costs in the form of PMI (private mortgage insurance). Refinancing allows the home buyer to solidify the homeowner’s lower loan-to-value, receiving a better interest rate and removing PMI from their monthly payment.
For example, when the homeowner bought the home, the purchase price was $200,000. The homeowner acquired the home with a 10% down payment of $20,000 and a loan of $180,000, meaning the interest rate is higher and PMI is required. Today, the same home is now worth $300,000. The home buyer can refinance the existing loan of $180,000 with a new $180,000 loan that has a lower interest rate and no PMI, significantly reducing the homeowner’s monthly payments.
How Do You Get Started with the Refinancing Process?
The first step is understanding your goals and objectives in the refinancing process. If you are looking to do a cash-out refinancing, understand how much you’d like to refinance and consider the uses of the proceeds. The next step is to talk through your goals and objectives with a lender and find out their requirements. At LendFriend Home Loans, we have a number of experienced professionals, who understand how valuable a refinancing can be to a homeowner and are ready to answer any questions that you may have on the refinancing process. LendFriend is here to help!
