As the Coronavirus pandemic continues, financial uncertainty has unfortunately become the norm for many families. However, many homeowners may be able to catch a break through cash-out refinances. Refinancing involves paying off your existing mortgage, and replacing it with a brand new one. This is typically done to receive a lower interest rate, or change the duration of a loan.
Cash-out refinances, or cash-out refis, allow borrowers to take out more money than needed to pay off the original mortgage. The difference goes directly to the borrower. Cash-out refis are often utilized to help pay for college education, major home renovations, or even consolidating debt. Cash-out refis are a great way to provide a large some of money to qualified borrowers at a fair interest rate.
Qualifying for a cash-out refi might be easier than you think. Even when mortgage rates were at their highest during the Coronavirus pandemic, there were still more refinance candidates in the United States, according to mortgage data and analytics company, Black Knight.
What are the Benefits of a Cash-Out Refinance
Cash-out refis can provide a wealth of benefits. Generally, borrowers are able to secure a lower interest rate, compared to, for example, home equity loans. This is because a cash-out refi is a primary mortgage while a home equity loan is a secondary mortgage, which is a greater risk to the lender.
Aside from the lower interest rate, cash-out refis are often very easy to receive.
The Process of Getting a Cash-Out Refi
Cash-out refi originations are very similar to any other purchase mortgage loans. Lender’s will check your debt, income, employment history, income, etc. There are many other similar steps regarding processes, paperwork, and additional fees, such as title search, insurance, origination fees, closing costs, and application fees.
Check out our refinance calculator to see if you a refinance could be beneficial to you. Be sure to shop around for other lenders too. Just because one lender won’t approve your application doesn’t mean another one won’t.
Cons of Getting a Cash-Out Refi
The primary factor in determining if you’ll be approved for a cash-out refi is that you must have a significant amount of equity in your home. You must receive enough money to pay of your existing mortgage, additional costs, and receive enough additional cash to make the refinance worthwhile.
Don’t forget that closing costs are typically between 2% and 5% of the loan price. That means if your loan is $300,000, then your closings costs could be between $6,000 and $15,000.
Some lenders also require a prepayment penalty. If you intend to pay off your initial mortgage ahead of time, using a cash-out refi or other loan, your lender may require you to pay a prepayment penalty fee.
It’s also important to consider that with an initial mortgage, as time passes and payments are made, a smaller portion of your monthly mortgage payment will go toward interest. When you use a cash-out refi, a larger portion of your payment will go toward paying off interest before the principal payment.
Your home will also be collateral for your cash-out refi loan. If you default on your loan, you risk losing the home to foreclosure.
Concluding thoughts on Getting a Cash-Out Refi during the COVID-19 Pandemic
Cash-out refis aren’t for everybody, but they can be extremely beneficial for many homeowners. And with the Coronavirus pandemic, we’re seeing more and more folks going through financial hardships. The best thing to do is talk to a mortgage loan officer and get a professional opinion to see if this loan product is right for you.