VII. Uses: Cash-Out Refi
VIII. Financial Benefits
IX. Potential Pitfalls
X. Cash-Out Refi Loans
XI. Alternatives
XII. Bottom Line

I. Ways to Refinance with Cashout

Below are the leading financial solutions to get cash out of your home.

• Home Equity Loan (HELOAN)
• Home Equity Line of Credit (HELOC)
• Cash-Out Refinancing

Your options include a second lien that leaves your current mortgage as-is, so you can keep your current mortgage interest rate. HELOAN, HELOC, and cash-out refinancing will each outshine a personal loan by comparison.

II. What is Home Equity?

The difference between the appraised value of your home and the amount you owe on your mortgage is considered your home equity.

III. Why Get Cash Out Now?

As property values reach new heights, and high-interest credit card rates escalate, a remarkable 44% of Americans have significant equity tied up in their homes (Attom Data, Homeowner Equity Grows Again Across U.S. in First Quarter, 2022). The US aggregate is a staggering $9.9 trillion of home equity (Black Knight, Inc., 2021 Sees Record $2.6 Trillion Tappable Equity Gain, 2022), with a household average of $185,000 (CNBC. Housing Wealth is Setting New Records for Both Owners and Sellers. 2022). Now could be a great time to unleash your home equity and refinance with cashout. Strong Home Mortgage offers three types of home equity financing: home equity loans (HELOANs), home equity lines of credit (HELOCs), and traditional cashout refinances.

IV. Uses: HELOAN vs. HELOC

Two of the aspects that make home equity solutions so appealing are the flexibility it affords and its ability to get cash out for homeowners. Compare against a more traditional refinance with cashout.

Reduce or Eliminate High-Interest Debt

Is a large credit card balance draining your monthly cash flow? Even as mortgage rates rise, HELOANs and HELOCs are still more attractive than any high-interest credit card (especially when you look recent all-time highs for adjusted annual seasonal rates at 21%). One of the best options to improve your cash flow is to convert that high-interest revolving credit card debt to a lower interest loan using the equity in your home.

Pursue Home Improvements

Create a more functional living space in your current home. Homeowners who locked in low rates over the last few years don’t want to give that up. With a lack of inventory on the resale side, many who might normally move to another home are instead remodeling their existing homes. Get cash out to renovate your kitchen or a bathroom. Finish an attic or the basement. You could even landscape your yard or build a pool and cabana.

Buy a Rental Property

Using your home’s equity as a down payment for an investment property that produces a positive cash flow can be a wise move. Rents from single family rentals and multifamily properties are also on the rise, which can make this an attractive option for those looking to get cash out to become landlords. There are risks as with every investment, so make sure you do your homework before jumping in.

Start a New Business

Ever thought about being your own boss? Now might be a good time to launch a venture. 4.3 million businesses were registered in 2021 (United States Census Bureau. Business Formation Statistics, 2022), representing a 24% increase over 2019. This trend is likely to continue as more Americans take stock of their lives, re-evaluate their personal goals, and potentially reduce dependency on corporations.

Pay for College Tuition and Expenses

A college education can unlock many opportunities. However, the average annual price of tuition, fees, and room and board (adjusted for inflation) has increased 59% per student since 2000 (National Center of Education Statistics, Digest of Education Statistics, 2019). One way to cover these costs is by tapping into your home’s equity to get cash out.

Establish or Augment an Emergency Fund

Not everyone has liquid cash for unforeseen circumstances. While some get cash out to establish or augment an emergency fund, it may not be your best option. It’s important to weigh the pros and cons to using your home’s equity for emergency expenses.

Stop Living Paycheck to Paycheck

In 2021, inflation reached 7.5% (Federal Reserve of St. Louis, 2021: The Year of High Inflation, 2021), while the average hourly earnings for workers was up 5.7% (U.S. Bureau of Labor Statistics, Employment Situation Summary, 2022). Leverage your home equity to get cash out in the form of an immediate cushion. While this can serve as a short-term fix to get you through a rough patch, make sure to re-adjust your budget to what you can sustain for the long run.

V. How Cash-Out Refi Works

A refinance with cashout is another strong way to liquify your home’s equity. Start by taking on a mortgage for more than the principal on your existing home loan. With the new refinance loan, you will have a larger outstanding principal balance, but you get cash back at closing.

VI. Cash-Out Limit

With a conventional or FHA refinance with cashout, you can borrow up to 80% of your property’s appraised value. The remaining 20% cushion helps offset any risk to you and your lender should the market take a downturn. You don’t want to find yourself underwater, which is when the amount you owe is more than the appraised value of the home. With a VA cash-out, it’s possible to take up to 100% LTV. This means you might be able to borrow up to 100% of the appraised value during a refinance.

Example

Your home is appraised at $675,000, and you still owe $475,000 on your mortgage. The maximum loan amount for a conventional or FHA loan would be $540,000, which results in an 80% LTV. If you were to take the maximum loan amount in this scenario, you may be eligible to refinance with cashout, $65,000 to be exact, at closing (minus closing costs). $475,000 of the loan proceeds would be used to pay off your existing mortgage and the remaining portion of the loan proceeds would be distributed to you at closing.

Please Note: There are several factors that may affect your eligibility, maximum loan amount, and the amount of cash you are eligible to receive at closing. Contact a loan officer to assess your personal situation.

VII. Uses: Cash-Out Refi

With a conventional loan, there are very limited restrictions on how you can use your cash. Perhaps you’d like to get cash out to build more wealth or better your financial situation. Some other popular uses include:

Complete Home Improvements

Bettering, renovating, or adding an addition to your home are all great ways to increase your home’s value and build more equity.

Consolidate High-Interest Debt

Interest rates when you refinance with cashout are lower than other forms of debt including personal loans and credit cards. Paying off high interest debt with a lower interest cash-out refi could save you thousands in interest payments.

Purchase an Investment Property

Interested in purchasing an investment property but don’t have enough cash on hand? It could make sense to leverage your equity and get cash out for a down payment on a positive-cashflow real estate asset. There’s also the chance that your investment property could appreciate over time, as you continue to build equity by paying down the principal.

VIII. Financial Benefits

Below are several common financial gains when you refinance with cashout:

Convert Equity to Cash

Get cash out for home improvements, debt consolidation, or another investment.

Access Larger loan Amounts

The maximum loan amount with cash-out refi is 80% of your home’s value. Median home values are fast approaching $400,000. Personal loans often cap at $100,000 with some lenders going up to $200,000.

Consolidate High-Interest Debt

Pay down high-interest debt in one lump sum at interest rates typically much lower than credit cards or personal loans.

IX. Potential Pitfalls

Be aware of the following potential pitfalls when you refinance with cashout.

Converting Unsecured to Secured Debt

This can be risky, since a cash-out refinance is secured by your home. That means your house is used as collateral in the event you default on your loan. In the event you aren’t able to afford the monthly payment, you’d risk losing your home.

Not Correcting Bad Habits

Be sure to correct any problems that may have put you in debt in the first place. Otherwise, you could find yourself in a worse situation. Examples include more debt or more interest payments for a longer period (especially if you extend the original term and decide not to shorten it).

Risk Foreclosure

You’re trading unsecured debt for secured debt. If you can’t pay back your loan, then you’d default on your mortgage and may lose your home.

Paying a Higher Interest Rate

Because interest rates when you refinance with cashout are typically higher than with a non-cashout conventional refinance, your interest rate is likely to increase.

Having Closing Costs

Like any other refinance, you’ll likely pay 2-5% in closing costs as you get cash out.

X. Cashout Refi Loans

Below are three refinancing solutions that make it easy for you to get cash out.

Conventional Cashout Refi

A conventional cashout refi may be used for different property types including an investment property. Interest rates may be slightly higher compared to a “rate and term” refinance where you do not receive cash back at closing.

Jumbo Cashout Refi

Not all lenders offer cashout jumbo refinance loans as the lending requirements are generally stricter due to higher loan amounts. In some cases, you may only borrow up to 70% of the total appraised value of your home. That means it may be more difficult to qualify for a jumbo cashout refi if you’re still early in your loan’s term.

VA Cashout/FHA Cashout Refi

This is a great option for those who already have a VA or FHA loan. VA and FHA cashout refinance loans can only be used for owner-occupied principal residences. Investment properties, and vacation homes aren’t eligible. VA and FHA Streamline Refinance Loans don’t permit you to refinance with cashout.

XI. Alternatives

If a refinance with cashout isn’t right for you, a home equity line of credit (HELOC) or a home equity loan (HELOAN) are two alternatives. A HELOC is a revolving line of credit with a draw period (usually 10 years) when you can get cash out via advances up to your approved draw amount and then converts to a repayment period (typically 20 years). A HELOAN is different as you will receive a cash advance at closing rather than having an ongoing credit line.

XII. Bottom Line

If you can get a solid mortgage rate, and put the money to good use, then a refinance with cashout is a great tool. If you get cash out for a vacation or a new car, then risk is elevated because you won’t save money in return. Because your home would be used as collateral, be sure to spend the money wisely. Be certain you can afford the new payment throughout the life of your new loan.

Ready to explore cash-out options?

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