Even if your home’s value plunged during the Great Recession of 2008, your home may have recouped much of that loss over the following years. If you desire to do so, you can tap your equity and use those funds for whatever you want. Here is what you need to know about cash-out refinancing.
Debt, Home Value and Equity
The equity in your home can be determined by first learning its current value, something an appraiser can set. That amount minus your outstanding mortgage represents the equity in your home.
So, if your home is worth $240,000 and you have $120,000 left on a $180,000 home loan, then your equity is now $120,000. Ask a real estate agent to refer you to an appraiser or visit Appraisalinstitute.org to find one in your area.
Unlike a home equity loan, cash-out refinancing replaces your current loan and gives you money too. You will have to pay closing costs, but your interest rate should come in lower than a home equity loan. Although you have $120,000 in equity, most banks will allow you to tap no more than 80 percent or $96,000.
In your case you were looking to take out $25,000 to pay off some medical bills, fix your car and put a new roof on your home. Add that $25,000 to the $120,000 outstanding on your mortgage and your new loan will be for $145,000.
New Loan Terms
As tempting as it may be to tap the equity in your home, you can get in trouble if you take out too much equity or extend your loan length. You may not be able to afford the higher monthly payments and you may find that starting over with a 30-year loan just does not work for you. You are not getting any younger and you would like to be debt free by the time that you retire.
Instead, you might choose to take out a smaller amount as in this example and ask the bank for a 20-year loan. You will then calculate your new monthly mortgage payment to determine if you can afford it. If you bank does not offer shorter term loans, then contact other banks. In fact, it is always a good idea to shop around to compare your refinancing options.
Cash-out refinancing is an attractive option, but it is not the only choice you have when it comes to tapping your home’s equity. Both a home equity loan (HEL) and a home equity line of credit (HELOC) can provide the cash that you need and without closing costs while retaining an important tax deduction.
Speak with your accountant about your options and check with your banker to compare rates and loan terms. Only borrow the money that you need and avoid taking out cash for frivolous reasons. Remember, your home is your nest egg and not a piggy bank.
See Also — When Not to Refinance Your Home