The housing market of the past six years has forced many people to stay in their homes, even if they wanted to move. Waiting for the economy to rebound, many homeowners are holding out for higher values before selling their home. This has left some families in a home that may not meet their current needs. Whether you have had another child, are a recent empty nester, or simply tired of the same old kitchen cabinets, you can complete a cash out refinance to get the money you need to remodel your home.
A renovation can breathe life into your home and make it feel new again. Simple things like expanding the kitchen, buying new appliances, or creating a dream master bathroom, can transform the feel of your home and make it more enjoyable to stay. Getting cash out used to be a common occurrence but in recent years many mortgage lenders stopped offering it as an option. As the housing market has slowly picked up steam, mortgage bankers have started offering cash out loan programs again.
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What are the Differences Between a Cash Out Refinance and a Rate Term Refinance?
A cash out refinance increases your mortgage balance where a rate term refinance keeps it the same.
Cash Out Refinance
In a cash out refinance you are increasing the amount of your mortgage loan. When you refinance an existing mortgage loan is paid off in full, and the new loan amount is increased by the amount of cash you are getting plus closing cost.
For example:
Current Mortgage Loan: $200,000
Closing Cost: $2,500
Cash for Remodel: $30,000
New Loan Amount: $232,500
Your new loan will have an updated interest rate based on the current market conditions. Since interest rates are low right now, your monthly mortgage payment may not increase very much.
Here’s how it works:
If your current mortgage loan has an interest rate of 5%, fixed for 30 years, and the original loan amount was $220,000, your monthly mortgage payment would be $1,181. If you got the cash out refinance that took your loan amount to $235,000 at 4.3% for 30 years, the mortgage payment would be $1,163. While the actual loan amount increased, the overall payment decreased. It is possible to obtain a cash out refinance and decrease your mortgage payment at the same time.
Rate Term Refinance
In a rate term refinance the amount of money you owe stays the same. Your mortgage balance is not increased. The only exception to this is that some lenders will let you add the closing cost to your mortgage balance. The FHA Streamline, HARP loan, and the VA’s IRRL loan program are all rate term refinances. These programs will lower your mortgage interest rate, often without getting an appraisal or requiring updated income documents. Since your interest rate is being lowered, it improves your chances of making the mortgage payment on time. This type of refinancing is much faster and easier to close than a cash out refinance.
Speak with your mortgage lender about your current situation and goals. They can help you to decide which type of home loan you should get and tell you if you would qualify for a cash out refinance. Now that home values have started rising, and interest rates are low, it is an excellent time to get the cash out you need to make your home more beautiful and functional.
