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Three Ways You Can Use a Cash-Out Refinance

Refinancing your home lets you replace your old mortgage and its terms and conditions with a new mortgage that may feature perks like a lower interest rate or a different repayment period. A cash-out refinance is a type of mortgage refinancing option that not only gives you a new mortgage with new terms and conditions, but it also lets you free up and borrow a portion of the equity in your home as discretionary cash. Here’s how it works — and how it could help you and your family.

How to Do a Cash-Out Refinance 

Cash-out refinancing depends on a homeowner having a significant level of equity in their home. Equity typically can come from a number of sources: the amount of principal you’ve paid on your home loan, the money you’ve invested in improvements to your home and market increases in the appraised value of the home. The amount paid on the principal is a hard-and-fast figure that represents equity, improvements that you make to your home and climbing home values in highly desirable areas. These factors can increase both your particular home’s appraised value and your level of equity.

Making the Cut. Getting the Cash.

Many lenders follow an 80-20 standard, meaning that in order to finance or refinance, the homeowner should have or maintain at least 20 percent of the appraised home’s market value in equity and finance no more than 80 percent of the appraised value.

To answer the question of whether you would be eligible to refinance and convert some of your equity into a cash-out option, you need to know the value of your home versus what you still owe on your home. If the difference—representing equity—safely exceeds 20 percent of the value, you may be eligible to refinance your home mortgage and extract a portion of the equity in cash.

Since homeowners who opt to withdraw cash from the refinance process are actually borrowing a portion of equity from the lending institution, the amount of the cash-out will be added back into the amount owed on the new loan. So, for example, if you still owe $100,000 on a home that is now valued at $300,000 and you decide to cash out $50,000, in settling the refinanced mortgage, you’ll get the $50,000 cash-out to use for your purpose, but your new mortgage balance will now show that you owe $150,000.

How Homeowners Can Use Cash-Out Refinancing

For homeowners who need funds for a significant expenditure but cannot or are unwilling to assume an additional monthly payment like a home equity loan or other type of loan, cash-out refinancing gives them a way to gain access to their own equity while keeping all transactions under one loan and one monthly payment.

These loans offer a possible solution for any number of situations. However, to avoid overborrowing and having to pay interest on surplus funds or spending extra funds frivolously, you’ll want to be clear about what the money is being used for and exactly how much you actually will need. Here are some great reasons people choose to use a cash-out refinance:

  1. Adding a Swimming Pool

HGTV reported in 2020 that the addition of an in-ground pool yielded, on average, a five to eight percent increase in home value based on their sample population. Overall, many homeowners agree that having a pool adds to the desirability of their home and can increase buyer interest when it comes time to sell. Unfortunately, reworking your backyard to include a pool is expensive work, with the average pool project costing between $28,000 and $55,000. That’s where cash-out refinancing comes in. 

With direct access to a large sum of funds, you can completely cover the costs of adding a new pool, all while bundling the payment into your refinance — so you can bask in the pool of your dreams without needing an additional loan that may come with a much higher interest rate.

  1. Remodeling Your Kitchen

Kitchen renovations are considered one of the most lucrative investments you can make on your home — especially if your current digs are severely outdated. These renovations can return nearly 83% on investment, according to Remodeling Magazine, which means they are usually well worth the money and effort you put into them. After all, people love spending time in the kitchen, whether it’s for parties, family dinners or game days, so having an attractive space to congregate in makes any home that much more appealing.

Cash-out refinancing helps by giving access to all the funds needed to secure materials, hire contractors and keep the ball rolling — all without the potential for delays or unexpected financial snags that could come with 3rd party loans.

  1. Upgrading Your Patio or Yard 

Whether you’re in your home for the long haul or are looking to move in the near future, curb appeal is king. Your outdoor areas add just as much charm to your home’s total package as any of your indoor features. In fact, tidy landscaping and patio features can increase perceived home value by up to 11% according to one study done by Michigan State University. Plus, who doesn’t love being surrounded by beautiful greenspaces?

Like pool construction, outdoor projects can quickly add up depending on what you’re having worked on. Landscaping can cost upwards of $20,000 and that bottom line grows with patio upgrades and add-ons. Cash-out financing can help you finance your outdoor project, but it’s important to outline everything you want to be done and speak to your contractor to ensure your total cost is accurate before initiating a refinance.

Make Your Equity Work for You

Refinancing your mortgage with a cash-out option is like taking out any other mortgage in that you still typically must pay for closing costs, an appraisal and other fees regularly associated with mortgages. What differentiates the cash-out option is being able to borrow a chunk of the equity you have in your home, use it for another purpose and repay it over the term of the new home loan.

If you’d like to see just how much equity you’ve accrued in your home and explore your options for making a portion of it work for you, the experienced mortgage specialists at La Capitol Federal Credit Union are a great place to start. Let us be your local resource for helping you make the most of everything you’ve worked hard to achieve.


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