If you’re like most American homeowners, your home is your largest investment. But more than just being an investment, it’s also, you know, your home. It’s the place where you live, which means you want your home to be as great as it possibly can be. That’s why you probably have oodles of improvements you’d like to make to the place if you had the funds, right? Replacing some windows, redoing the kitchen, and maybe even adding some footage to the floor plan. However, home renovations can be pricey, and most of us don’t just have the budget lying around to finance such a thing.
However, there’s a simple way to get additional funds to do home improvements, which can make your home a nicer place to live and significantly boost the value of your property: a cash-out refinance, also called a cash-out mortgage. In this post, we’ll look at:
- Why you might want a cash-out refinance
- The various steps of the cash-out refinance process
What’s a Cash-Out Refinance, and Why Do You Want One?
On some level, a cash-out refinance is basically like any other mortgage refinance. To put it in plain English, a mortgage refinance is taking out a new mortgage with different terms, using it to pay off your initial mortgage in full, and now making payments on the second one.
Mortgage refinances are typically used to change things like interest rates or monthly payments. For instance, if you get a new job that lets you absorb higher monthly payments, you might refinance your mortgage to get a shorter payment period, saving you money in the long run and letting you fully own your home sooner. On the other hand, if you have unexpected costs you need to account for, like the birth of a child or a family member’s illness, you may want to refinance your mortgage to have lower monthly payments, at the tradeoff of having a longer—and, thus, more expensive overall—mortgage period.
However, in both of these cases, the new mortgage amount is more or less the same as your remaining balance on the first mortgage. All you’re doing is changing the terms. For a cash-out refinance, however, the total of your new loan will be higher than the remaining balance of your mortgage, usually by tens of thousands of dollars—if not more.
Why would you take out a mortgage much higher than what you have remaining? It’s a good question, with a good answer: because the difference between the new mortgage amount and your prior balance is given to you as cash. Hence the term “cash-out refinance.”
So, in other words, a cash-out refinance lets you take out a new mortgage at a higher amount than remains on your old mortgage, and then you pocket the difference. This can give you a huge influx of liquidity that you can use to, say, renovate your kitchen or complete your shrine to David Hasselhoff. We won’t judge.
(We might judge a little.)
What Are the Steps of the Cash-Out Refinance Process?
Good news: since you’re already a homeowner, you’ve basically already gone through the cash-out refinance process already when you bought your home. After all, seeking a new mortgage is more or less the same as seeking your first one, only it’s even better since you don’t have any of the pesky “actually finding a house to buy” problems that come the first time around.
Step 1: How Much Extra Liquidity Do You Need?
This step in the cash-out refinance process is simple: how much more money do you need? This is the planning stage, where you should carefully consider all the improvements you want to make to the house, seek quotes from contractors who could possibly do them, compare material costs, decide if you really need to bid on the swimsuit the Hoff wore on the first season of Baywatch, and so on. Better yet, you could consider some home improvements that could wind up saving you money on your tax bill.
You need to decide if this will be a $15,000 renovation or a $200,000 renovation, in other words. Planning here is key. You don’t want to take out a cash-out refinance that’s too much or too little.
Step 2: Collect Relevant Information
When you approach a lending institution for any mortgage refinance, you’ll want to bring all the relevant documents: the terms of your current mortgage, your current income, any extant debts besides your mortgage, and so on. Bring along anything that you would have used for your first mortgage. If you have documents like quotes from contractors, bring them too, but they aren’t necessary.
Step 3: Compare Alternatives
Which lenders will give you the best terms? Compare interest rates, monthly payments, and closing costs, just like you did with your first mortgage. One thing to carefully note here is that, unlike a first mortgage, there will usually be a cost to switch mortgages. This can include things like a loan discharge fee, a fee to break your mortgage, or any fees charged if you switch to a new lending institution.
Step 4: Calculate Against Your Finances
Getting a cash-out refi to make improvements to your home feels great, and at the end of the day, it will increase the value of your home, helping you to sell it for more than if you never made the changes. (We’re still not sure about the Hoff shrine, though.) But there is a downside—since your new mortgage has a higher value, your monthly payments will increase. So, unless you intend to “flip” the house right away to take advantage of the higher value, you’ll be making higher monthly payments for years to come.
Make sure you can absorb those payments into your monthly budget before you sign on the dotted line.
Step 5: Sign on the Dotted Line
If you can afford those newer monthly payments, then great. Sign the documents, call your contractor, and enjoy your new and improved home and/or David Hasselhoff shrine.
And remember: it’s always worth talking to experts who can guide you through the process. Talk to your local trusted bank or credit union when you start the cash-out refinance process to ensure you have a game plan for every step of the way.
If you’re in the Yakima, Washington, area and looking to utilize a cash-out refinance for home improvements, contact a Home Loan Guide at Solarity Credit Union to discuss your options. They’ll walk you through the cash-out refinance process, from determining your available home equity to eSigning your closing papers.