If you own a home and carry debt in several common ways (student loans, credit cards or medical expenses, etc.), then you should know about a valuable option with respect to loan refinancing.
That’s because the program can help you pay off debt by using the equity you have gained in the property. It’s called a cash-out refinance, and here’s how it works.
Let’s say you have a loan balance of $180,000, and your house is valued at $300,000. That means you have 40 percent equity in the home ($120,000).
Depending on the loan program, you may be able to take 50 to 100 percent of the equity to use at your discretion. The total (e.g.: $180,000 loan balance plus amount taken out of the equity) then becomes a new loan with revised terms.
A cash-out refinance isn’t just for paying off debt. You can also take advantage of the option to remodel your house, pay for a child’s tuition, fund a wedding or another need altogether.
The program is appealing because it allows homeowners to consolidate debt as part of a mortgage, which stretches the monthly payments — like for a credit card — across a long timeline like a 30-year mortgage.
It’s important to know what’s possible within each loan program. Here’s the breakdown:
Conventional loans pay up to 80 percent of the equity in your home, and you can use the money for investment properties and second homes.
FHA (Federal Housing Administration) loans will accept up to 85 percent of the equity in your home. It’s available for a primary residence only.
Lastly, with VA (Veterans Administration) loans, you are allowed to use up to 100 percent of the equity in your home. Like FHA loans, though, the option is for a primary residence only.
Here’s a real-life example of a cash-out refinance. I had a recent client take advantage of the refinance option so he could pay off three credit cards and a personal loan. Yes, his mortgage payment did increase by $200 a month. But combined, his debts had cost him $600 a month.
Now, he saves $400 a month and plans to put the savings toward retirement.
If you have debts you want to pay off, remember the cash-out refinance option and the use of your equity.
The answer to your financial situation may be in your home right now.
Shikma Rubin is a loan officer at Tidewater Home Funding in Chesapeake. She specializes in lending for the millennial generation. Sign up today for Rubin’s free webinar, “First-Time Homebuyer Crash Course,” at shikmarubin.com/webinar. You can reach her at srubin@tidewaterhomefunding.com or 757-490-4726.