What Can You Use A Cash
A cash-out refinance lets you cash in on the equity you’ve accumulated in your home. You can spend the lump sum of money you gain from the refi on pretty much anything you want. A cash-out refinance might be a good way to pay for a home improvement project, debt consolidation or unexpected car repairs, for instance.
However, a cash-out refinance isn’t always the best route to take when you need extra money. Cash-out refinancing has some disadvantages versus other forms of borrowing, including hefty closing costs and a potential home foreclosure. For these reasons and more, a personal loan or other borrowing options might be preferable as ways to slash high-interest debt or make a large purchase.
Before you settle on a cash-out refinance, consider the pros and cons, and weigh all of your options. You want to make sure your refinance isn’t creating more problems than it solves.
What Is A Home Equity Loan
Like cash-out refinance, home equity loans provide a one-time lump sum of money by using the equity accumulated in your home. However, unlike cash-out refinance, home equity loans create another lien on your home. This is why they are sometimes called a second mortgage. Monthly repayments must be made in addition to payments on your original mortgage, meaning that a default on a home equity loan could lead to foreclosure.
Four Ways To Get Rid Of Pmi
Understandably, most homeowners would rather not pay for private mortgage insurance .
Luckily, there are multiple ways to get rid of PMI if youre eligible. Not all homeowners have to refinance to get rid of mortgage insurance.
Homeowners with conventional loans have the easiest way to get rid of PMI. This mortgage insurance coverage will automatically fall off once the loan reaches 78% loantovalue ratio .
Or, the homeowner can request that PMI be removed at 80% LTV instead of waiting for it to be taken off automatically when home equity reaches 22% .
When requesting PMI removal, the loantovalue ratio may be calculated based on your homes original purchase price or based on your original home appraisal .
Or, if your homes value has risen, you may be able to order another appraisal and remove PMI based on your homes current value.
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Blend And Extend Your Existing Mortgage
Your existing mortgage lender may offer you a âblended rateâ essentially, a âblendâ of your current mortgage rate plus any additional money you borrow at current market rates. Blended rates are almost always higher than the most competitive mortgage rates on the market, so make sure you compare the blended rate against the savings if you break your mortgage.
How Much Are Prepayment Penalties
When you agree to a particular mortgage term, your are signing a contract for that amount of time, generally between 1 and 10 years. If you break your mortgage before that term is over, you’ll be charged a prepayment penalty, as a way to compensate the mortgage provider. How much this can cost varies wildly based on the type of mortgage you have, the time remaining on your term, as well as your mortgage provider – each lender has a different way to calculate prepayment penalties.
The exact prepayment penalty calculation that applies to you will be laid out in your contract, but there are two methods used, outlined below.
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How Much Can You Save By Refinancing Your Mortgage
A mortgage refi has the potential to save you thousands of dollars over the term of your loan. A difference of even one percent in your interest rate can result in significant savings. Here are some examples of just how much money you could save over the term of your home loan if you refinance today.
- If you have a $250,000 30-year mortgage with an interest rate of 3.875 percent, and you refinance it into a 30-year mortgage with an interest rate of 2.875 percent, you would reduce your payment by $138 a month and save more than $20,000 in interest, not including closing costs.
- If you refinance that same mortgage into a 15-year mortgage with an interest rate of 2.375 percent, you reduce your total interest by more than $96,000, and choosing a 10-year loan would save more than $112,000 in interest.
You could also save big by refinancing your mortgage especially when interest rates are at record lows. To see just how much money you could save overall, visit Credible. Credible allows you to compare mortgage lenders and shows you prequalified rates within just minutes of inserting your information.
Determine Your Credit Score
How well do you handle your finances? Will your current allow for you to obtain another loan?
Most lenders will evaluate your creditworthiness before signing a mortgage refinancing contract with you. They will assess whether you will be able to pay your mortgage installments every month, as agreed.
One of the things that determine your credit score is your debt-to-income ratio. When your debt is less than your income, your chance of approval is higher and vice versa. Your application will likely be turned down if your overall credit score is too low.
Most lenders reject applications from people with excessive debt, unemployed individuals, or those who have filed for bankruptcy in recent years. Lenders would consider this type of applicant as high risk.
When you know that your credit score is low, the best approach is to try and improve the score before applying to refinance your mortgage. As you go about determining how to refinance your mortgage, improving your credit score will assist in gaining the lenders trust.
Therefore, if your credit score is not where you need it to be, make sure to improve it as much as possible before thinking about how to refinance your mortgage.
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Ready Your Home For An Appraisal
Youll want to provide the best estimate you can for the value of your property at the time of application, based on your previous appraisal, online estimate sites and an evaluation by a real estate broker, if possible.
Once you apply for a refinance, youll need to get your home ready for the appraisal, which determines whether your estimate is correct. If you delay the appraisal, it will push back the completion of your underwriting and the refinance closing.
Be prepared to schedule the appraisers visit as soon as possible. It might help to provide the appraiser with a list of upgrades made to the home, which can influence the value.
Make sure to tidy up your home inside and out because curb appeal can influence the homes value. Make needed repairs so that the appraiser doesnt notice a leaky roof or basement broken toilet or windows or a pockmarked driveway. Also, clean up clutter in your yard and inside the home.
Make Down Payment On An Investment
Are you an expert stock picker? If you could make 10 percent to 20 percent on an investment and you are only going to pay 4 percent for the interest on a cash-out refinance, why wouldn’t you do it? Well, first you have to figure out if that investment truly will pay off. There are no guarantees. But research the investment and see if it fits into your financial plan for the future.
Some people use the cash-out refi to get enough money for a down payment on a second property that they can make into a rental for an investment. It is cheaper money than taking out a home equity loan or borrowing from your 401 retirement plan. Others want to put down a down payment on their dream vacation home. It could be that beach house or a mountain cabin. Wherever it may be, you feel that it is time to splurge on something you’ve always wanted. Adding to your quality of life is priceless â but there is a price to getting a cash-out refinance. You do have to pay it back every month, and the equity in your home is now depleted.
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Should I Refinance My Mortgage
If interest rates have dropped since you signed your mortgage, you might think about refinancingOpens a popup.. But before you take the leap, there are a few things to consider.
When you refinance your mortgage, you replace your existing mortgage with a new one on different terms. To find out if you qualify, your lender calculates your loan-to-value ratio by dividing the balance owing on your mortgage and any other debts secured by your property into the current value of your property. If your loan-to-value ratio is lower than 80%, you can refinance.
The lender also looks at your monthly income and debt payments. You may need to provide a copy of your T4 slip, notice of assessment or a recent pay stub your mortgage statement a recent property tax bill and recent asset statements for your investments, RRSPs and savings accounts.
How Long Does It Take To Get Funds From A Cash
When you close on a cash-out refinance, dont expect to take a check home with you the same day. According to Melissa Cohn, an executive mortgage banker and Regional Vice President at William Raveis Mortgage, youll have to wait a few days after closing to receive the money.
If this is a primary residence, there is a rescission period of three business days after the closing to receive the funds, Cohn said. If it is a second home or an investment property, then the funds are available the same day.
This three-day period is a legal right that borrowers have called the right of rescission. When you close on your refinance loan, you have three business days to change your mind and rescind the contract. Once this rescission period has passed, your lender will issue the check for the cash-out portion of your refinance loan.
In some cases, it may be possible to waive your right of rescission and receive the money sooner. But for this to happen, there usually must be a personal financial emergency, and you must provide a written statement to the lender explaining the emergency and clearly waiving the right of rescission.
Keep in mind that if you do waive your right to rescission, you can no longer change your mind about the cash-out refinance within the normal three business days.
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Should I Refinance If Interest Rates Are Low
When interest rates fall, the possibility of getting a lower mortgage rate is a strong reason to consider refinancing if you need additional funds. A reduction in your mortgage rate could lead to significantly lower monthly payments.
However, you must factor in the costs of ending your current mortgage, including any prepayment charges, as well as how long you expect to live in your home. Only then can you determine whether its worthwhile to refinance at a lower rate.
The Pros And Cons Of Refinancing
| Pros of refinancing | Cons of refinancing |
|---|---|
| Access the equity youve built up in your home. | Increasing the amount you are borrowing may lengthen the time it takes to pay off your mortgage. |
| Consolidate your debts and lower your overall interest rate. | Your overall interest rate might be lower but the amount owing on your mortgage may be higher. |
| Possibly get a lower interest rate and pay less for your mortgage over time. | There may be additional costs, including a prepayment charge. |
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Refinancing To Consolidate Debt
If you have enough equity in your home, you might be able to use built-up equity in your home to pay-out high-interest debt through a mortgage refinance. For example, if you have a number of outstanding debts, such as a car loan, a line of credit, or credit card bills, you may be able to consolidate this debt through the variety of mortgage refinance options available.
Why Use A Mortgage Refinance Calculator
Refinancing your mortgage can be a really valuable option as a homeowner. However, there are costs associated with refinancing, which can outweight any potential savings you might make. As a result, it’s important to understand how much a mortgage refinance will cost you before you pull the trigger – that’s where a mortgage refinance calculator comes in handy.
The mortgage refinance calculator above will do the hard work for you, estimating the penalties associated with refinancing, as well as the potential savings you’ll make from getting a new mortgage at today’s rates. While there are some non-financial reason you might want to refinance your mortgage, our calculator gives you the information you need to start making a decision.
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Refinance Mortgage To Invest
- There are many Canadians who have high pensions, and low RRSP limits because of these pensions, which may be wise to invest low-interest mortgage money into a TFSA. The TFSA can be a very powerful and effective tool when funded with a low mortgage rate. This tax-free investing is potentially a big opportunity for many Canadians.
- The money that you use to invest in any non-registered investment is likely tax-deductible.
- For example, the funds used to invest in a rental property, stock or bond, second mortgage investment or other income-producing investment are likely tax-deductible.
- For example, if you pay $10,000 per year on interest for money used to invest with, and if you are in a 40% marginal tax bracket then, in this case, you could write off $4,000 of interest resulting in a $6,000 after-tax interest cost . Reflected as a rate, a 2.49% interest rate, using the same 40% marginal tax bracket, becomes an after-tax effective rate of 1.49%
- Consider taking a higher fixed rate, since as an investor the payments will be more consistent on your mortgage, and also the slightly higher rate than variable will result in a bigger tax deduction. A lower variable rate that carries a higher risk premium will also result in higher after tax costs because there is less income tax to deduct.
How A Cashout Refinance Affects Your Taxes
Borrowers may qualify for mortgage interest tax deductions, provided that funds from the cashout refinance are being used for property improvements. Some examples of home improvements that are eligible for mortgage interest tax deductions could be:
- New additions to a home
- Home security installation
- Roofing repairs
Disclaimer: TheMortgageReports does not offer tax advice on this site. Please consult with a tax advisor about your situation before making any decisions about how a cashout refinance affects your taxes.
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Use Your Homes Equity Wisely
Remember that you reduce the ownership percentage of your home whenever you access your homes equity. This means that youll either pay more in interest over time or youll need to make more payments before your mortgage matures.
You should never access your home equity for everyday expenses. This can quickly trap you in a cycle of debt. Instead, use your home equity for large, one-time expenses like covering medical bills or consolidating credit card debt. Consider your financial situation to make sure you can handle your new payments before you sign on your new loan. From there, stay on top of your payments and avoid falling back into debt.
Shop Multiple Mortgage Lenders
Getting quotes from multiple mortgage lenders can save you thousands. Once youve chosen a lender, discuss when its best to lock in your rate so you wont have to worry about rates climbing before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of fees and whether theyll be due upfront or rolled into your new mortgage. Lenders sometimes offer no-closing-cost refinances but charge a higher interest rate or add to the loan balance to compensate.
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What Do People Use A Cash
People use a cash-out refinance for a variety of reasons. They include:
- A lower mortgage interest rate. With a cash-out refinance, you might be able to swap out a higher original interest rate for a lower one .
- Home improvement projects like a kitchen remodel, a replacement HVAC system or a new patio deck. If you put the cash-out proceeds toward a project that increases the value of your home, the mortgage interest is tax-deductible.
- Emergency expenses, such as an unexpected hospital stay or unplanned car repairs.
- Education expenses, such as college tuition.
- Consolidating and paying off high-interest credit card debt.
When Should You Refinance Your Mortgage
You may want to consider getting a new loan if youre currently required to pay private mortgage insurance . If you can refinance your home with a loan that is less than 80 percent of the value of your home, you could eliminate the PMI charge, which can be 0.5 to 1 percent of the loan. If your home has appreciated or you can put more money down, this may be a great step.
Also, consider how many months into your mortgage you already are. If your mortgage is just a year or two old, you won’t impact your term significantly if you choose a loan with the same term. But if you’re 10 years into a 30-year mortgage, refinancing with another 30-year mortgage tacks 10 years onto your loan’s length, erasing the headway you’ve made so far. If you still want to refinance, choose a shorter term, such as 15- or 10-year loan.
No one knows how long the low rates will last and what the economy will bring. If you determine that refinancing is right for you, lock in low rates to save money and improve your budget in this uncertain time.
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