How do you start buying your first Omaha NE home? The hardest part about buying…
How can a homeowner benefit from a cash out refinance?
A cash out refinance is a way to take out some of the equity you have built in your home. The cash out can pay off your current loan while also taking out additional funds for debt consolidation, home improvements, or for anything you may need a large amount of funds. In some cases it is possible to take cash out and still see little or no increase in your monthly house payment.
My team and I are a local mortgage lender serving Omaha, Papillion, La Vista, Bellevue, and all of eastern Nebraska. If you are curious about a cash out refinance please contact us and we can determine if a cash out refi is right for you.
- First a great story about the benefits of a cash out refi
- How much equity do you need in your home?
- Debt consolidation cash out
- Home improvement cash out
- Springboard your investment portfolio
- How does a cash out work?
A great story about a client’s cash out refinance
Many people are familiar with a standard rate and term refinance. When rates drop people reach out to see how much they can save by lowering their interest rate. This is a great way to lower your payment and can be beneficial for many homeowners. But a cash out refinance can, in some cases, be life changing.
A client left with family debt needed help
At the beginning of 2019 I was referred to a homeowner who had lost her husband. Her estate attorney sent her my way to see if she could lower her mortgage payment. She just wanted to refinance the current loan into a lower rate mortgage and she could have done this. However, the savings from a rate and term refinance was maybe $100 a month off her payment.
After reviewing her application, I noticed that she had a lot of maxed out credit cards and a few unsecured loans. Her and her husband had owned the house for many years so she had a lot of equity available. It was clear based on her income and the minimum payments on her consumer debts that she was struggling just to make the minimum payments on all the debt that had accrued while her husband was ill. I suggested we do a cash out refinance and roll all of her debt into her mortgage.
At first I could not convince her to go this route. She did not want a higher mortgage balance. I went through the benefits and she still did not want to move forward. Fortunately, a few days later she called me back and said “I get it!” and she wanted to discuss it further.
We were able to roll 8 credit cards, a car loan, and a few unsecured loans into a new mortgage with a lower rate. We kept her current mortgage payment almost exactly the same and eliminated almost $2500 a month in minimum monthly payments.
Cashing out to drastically improve your finances
This is where your home equity and a cash out refinance can have a life changing impact. The attorney that referred me called several months later and said she was overjoyed with her new situation. She had her finances in order and was finally out of the debt nightmare.
If you know someone that (parent, grandparent, uncle, etc) that has owned a home for some time and you think could use some help with their finances, this is what a cash out refinance was built for.
How much equity do you need in your home?
A cash out refinance does have limitations. A homeowner cannot take all the equity out of their home with a cash out refinance. Most loan programs are limited to 80% of the appraised value of the home. If you just purchased with a low down payment loan, a cash out refinance is probably not going to work for you.
But in Omaha and the surrounding area homes have increased in value quite a bit of the last 5 to 10 years. If you purchased in this time frame you may have opportunities even if you put down a minimal amount on your purchase. If you would like a rough estimate of your home’s equity, enter your address here:
Cashing out to consolidate debt
I covered the benefits of a debt consolidation cash out above, but just want to cover it a bit more here. If you are having difficulty paying down your consumer debt, and have the equity in your home, a debt consolidation loan is a great option.
Concerns about putting debt into a longer term loan
One hesitate I hear on a debt consolidation loan is putting shorter term debt into a 30 year mortgage. This makes sense, but in some situations there is still a huge benefit. With rates as low as they are on home loans, moving a high interest credit card debt to your mortgage will save you a ton on interest. With a fixed rate mortgage you do not have to worry about your interest rate fluctuating like it does on credit cards. Plus, like the story above, freeing up hundreds or thousands a month in minimum credit card payments allows you to throw more money at your mortgage principle. You can still pay off your mortgage quickly by taking the monthly savings and applying it to your mortgage.
Cashing out to improve your home
Another common use of the cash out refinance is for home improvements. If you have been in your house for several years, you have probably thought about making some improvements. Perhaps updating the kitchen or finishing the basement. Maybe when you bought the home you had plans to save up for these improvements and it just never quite got there. Using the equity in your home can be a great way to dive into these projects.
Contact your realtor
I do recommend reaching out to your realtor before starting any major projects. Some improvements can increase the value of your home and some can actually lower the value. A conversation with your realtor can help you decide exactly what projects will best improve your home’s value.
A great example of this is a client I had a few years ago. It was a young couple who wanted to do some major remodeling of their first floor. Their original plan was going to take the house from a 3 bedroom to a 2 bedroom. Now if they planned on being in the house for many years and wanted that gigantic master bedroom it makes sense. But after a conversation with their realtor, and figuring they would only be in the house another 5 years, he recommended they keep it a 3 bedroom because of the difficulty in selling a two bedroom home in their neighborhood.
If you are looking to cash out for home improvements or debt consolidation but you do not have the equity, you may still have options. Contact us and we can direct you on how best to use the equity available in your home. If it is not something we can help with, we can still point you in the right direction and get you in contact with professionals who can help.
Start your investment portfolio
Almost everyone has dreams of purchasing investment property and one day “semi-retiring” on the income generated. Heck this is my dream! But the hardest part is just getting started.
Home loans for investment property are available, but they typically require a down payment of 20% to 25%. Even if you are looking at a modest size property, that can be a big chunk of change. So why not use the equity in your primary home to get started?
Starting your investment empire
The first few investment properties are the hardest to get. But if you have equity in your home you can take that out and use it for the down payment on one or more homes to get your investment portfolio started. Eventually there are ways to use the investment properties you own to purchase more investment (I am happy to go over this in more detail with a phone call), but a place a lot of investors start is with a cash out refinance on their current home.
I personally used a cash out refinance to start purchasing investment property and can walk you through the refinance process as well as becoming a landlord.
So how does a cash out work?
Most people that are refinancing currently have a mortgage on their home. A cash out refinance just means we are taking out enough to pay off that loan and extra for any of the above reasons. Let’s say you owe 100k on your current home and it appraises for 200k. With a cash out refinance we can go up to 80% of that appraised value. So you can take out a 160k loan. We use 100k of that to close out your current mortgage and the rest is yours to keep for debt consolidation, home improvements, investment, or anything you want or need. As long as you meet the income and credit guidelines we are good.
The great part about the cash out refinance is that it does offer some flexibility. Having that extra equity and extra cash allows us a few extra options. Let’s say you want to take cash out for home improvements but your debt to income ratios are just a bit too high. In this case we can look at paying off one or two high payment debts and giving you the rest in cash. Let’s use the same scenario. You owe 100k on a house worth 200k. You want cash out for home improvements but your debt ratios are just a bit too high. But perhaps we can make it work by paying off 20k in high interest and high payment debt to get your ratios in line and still give you 40k to use on your home. This sort of flexibility often makes a cash out refinance easier than a rate and term refi or a purchase.
Other useful links
- How to improve your credit
- The 20% down rule on conventional
- What is Escrow?
- How is income calculated?
- Why your assets matter
- Mortgage Calculator
- Is Credit Karma accurate?
- FHA vs Conventional, which is better?