In the fourth and final part of OneAZ’s Cash-Out Refinancing series, Chris Peach lays out what you need to take into account before deciding whether a cash-out refinance is right for you. He’ll break down some of the costs you need to know about and important information about loan terms.
Other Things to Consider
As straightforward as a cash-out refinance is, there are still some things to know before you apply. Here are important considerations to keep in mind when choosing a cash-out refinance.
Home Equity Loan vs HELOC vs Cash-Out Refinance
Like a cash-out refinance, a home equity loan is a lump-sum installment loan guaranteed by the equity in your home. The major difference is the home equity loan is actually a second mortgage on your home (usually with a higher interest rate), whereas a cash-out refinance is a brand-new first mortgage.
A HELOC is typically a second mortgage, structured as a revolving line of credit, that is guaranteed by the equity in your home. A HELOC gives you access to a credit line that you can draw from and pay back over a period of time.
There Will Be Closing Costs
There will be closing costs associated with the refinance. These costs include appraisal fees, attorney/title fees and credit report fees, etc. Generally, most refinance transactions incur approximately 2% of the new loan amount in closing costs which can be rolled into the loan. Closing costs may be higher if you choose to buy the interest rate down to lower than the prevailing market rate. Additionally, either scenario will result in reduced cash to you at closing.
If you have gone through the process of obtaining a mortgage loan before, you know this is not something that happens overnight. A cash-out refinance is similar and generally takes 30-45 days to complete.
Once the loan is approved, the Truth and Lending Act provides an additional 3-day right of rescission (cancellation clause) from the day the documents are signed. Therefore, borrowers can expect to receive their check 5-7 days after closing.
The Loan Terms May Change
Remember, with a cash-out refinance, the original mortgage loan is paid off and replaced with a new loan. This new loan may have a different rate, a different term and a new monthly payment.
For example, if you are five years into a 30-year mortgage and you do a cash-out refinance with a new 30-year loan, your payment schedule will start over again. Also, depending on your new interest rate and the amount you cash-out in the refinance, it could increase your monthly payment.
Talk this over with your lender and look at the closing disclosure to ensure you fully understand the terms of your new loan.
A cash-out refinance may be the perfect way to take the equity in your home and turn it into cash to use for whatever you need. Whether you’re doing a home improvement project, consolidating high-interest debt, or utilizing a cash-out refinance for numerous other options, the key is to have a plan for the funds before you apply.
Check out the other posts about cash-out refinance!
Chris “Peach” Petrie is the founder of Money Peach. Money Peach partnered with OneAZ to provide free financial education to members across the state. To learn more about OneAZ’s partnership with Money Peach, click here.