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The Ins and Outs of a Cash-Out Refinance | Dallas Mortgage

How to finance your home is one of the main questions of every new homeowner. 

If you don’t have adequate information about mortgages, the best mortgage company Dallas offering them, as well as different types of refinancing options, you might have to suffer the consequences.

Well, you don’t need to worry any longer. This article is going to be your ultimate cash-out refinance guide. We are going to tell you all you need to know about cash-out refinance, and the basic ins and outs of using it.

What is a cash-out refinance?

Before we head over to the whole process of cash refinance, let’s first take a look at what it actually is.

A cash-out refinance is a way of replacing your existing home mortgage with a new home loan. 

In simple words, your current home mortgage will be replaced by a much bigger home loan. You will generally be replaced with more than what you owe for your house. 

How you benefit from this is that you can take advantage of the equity you have built up in your home. Also, you will be provided with the difference between these two home loans. 

The difference between your existing home mortgage and the new home loan will be provided to you in cash. You can then use this cash to fulfill other financial needs of yours, or even for home remodeling, maintenance, or debt consolidation.

Cash-out refinancing is ideal when you can get your hands on a much lower interest rate, and make good use of the home equity you’ll be receiving in the form of cash.

Hence, a cash-out refinance helps you make the most of the home equity that you have built over the past years, by allowing you to take the difference between the current home loan, and the new home mortgage that will be replacing it.

How does a cash-out refinance work?

A cash-out refinance works more or less the same as a rate-and-term refinancing mortgage does.

Just like in refinancing your mortgage, your mortgage company will help you replace your old home loan with a new mortgage, usually of the same amount. In most cases, the new home loan will have a lower interest rate, and may also be for a shorter time period. The difference lies in the fact that you are able to get hold of part of your home’s equity that has built up over the years in the form of cash. 

Let’s take a look at an example for you to understand better. Let’s say, for instance, you have $100,000 remaining in your current home loan or mortgage. And, depending upon your home value, your home equity is around $200,000. 

In most cases, mortgage and loan lenders require homeowners to maintain at least 20% of their home equity, that too after a cash-out refinance. So, in the case of home equity mentioned above, you’ll need to have at least $60,000 home equity.

For the final amount, you will be allowed to borrow in cash, you must also not forget about the other fees you’ll have to pay, such as the closing costs, appraisal fees, and so on. 

Therefore, the final amount of cash you will be taking with you will be comparatively much less than the $140,000 we calculate from this home equity.

Pros of a cash-out refinance:

There are numerous reasons why homeowners prefer a cash-out refinance, usually because of these reasons: 

  • Lower interest rate

A new home mortgage can offer an interest rate that is much lower than the current home loan. This is usually because when a homeowner first purchased his house, interest rates might be higher in terms of current times.

  • Debt consolidation

Homeowners receive the difference between the old home loan and the new mortgage in the form of cash. This cash can be used to pay off credit cards with high-interest rates.

  • Improved credit score

When you pay off your credit card debt with the cash you receive, you can easily improve the credit scores that can allow you to receive a much better loan and mortgage from lenders.

Cons of a cash-out Refinance:

  • Foreclosure risk

You can, in extreme cases, even lose your home if you are unable to make mortgage payments in the future.

  • New terms

Because you’ll be replacing your old mortgage with a new one, this does not mean that your new mortgage will not have any new or different terms. This is why it is crucial to carefully check the interest rate, as well as other fees, that will be part of the new mortgage.

  • Closing costs

You must be aware of the closing costs of a cash-out refinance, which are usually between 2% to 5% of the mortgage.

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