Ideally, over time, as a homeowner, your monthly payments will have accrued to create one of the greatest assets of homeownership– your home’s built-in equity. Equity rises in contingency with your property value and fluctuates depending on your home’s appraised value. Eventually, with enough staked home equity, you will essentially be able to act as your lender by leveraging that equity to make large-ticket purchases or consolidate your consumer and installment debts.
There are a few ways as a homeowner you can tap into your home’s built-in equity. A cash-out refinance is one of the options available to you. It allows you to take out a new home loan for more than the balance owed while refinancing into better rates and terms on your mortgage loan. This can be especially true if you are refinancing from a conventional loan into a VA loan. This is because a portion of your VA has a federal-backed guarantee decreasing your mortgage loan risk, making you eligible to receive better rates and terms on your loan. Essentially, a cash-out refinance is like replacing your original mortgage loan with a better mortgage loan while being able to take out cash to have on hand.
With a VA cash-out refinance, you can take out a new loan for up to 90 to 100% of the value of your home’s built-in equity depending on the criteria set by your lender. From college tuition to student loans to weddings to home renovations to making other investments, or paying off consumer debts– once that cash is in your hand, you get to decide how to use it to put yourself in a better position financially.
Use a cash-out calculator to determine the amount of cash from your home’s equity available for you to borrow. Furthermore, this tool will show you your new monthly mortgage payment after refinancing, helping you to decide whether or not a cash-out refinance fits into your personal financial goals.
Should You Do a Cash-Out Refinance?
There are many reasons why you may want to consider a cash-out refinance loan. Of course, choosing how to use your cash-out refinance will be unique to each individual’s financial situation and should be scrutinized accordingly:
- Pay Off Larger Debts. You will often hear lenders talk about using our home’s built-in equity as a resource for debt consolidation. Debt consolidation works by using the cash you take out to secure private consumer loans, putting yourself in a better financial position by rolling those loans into your mortgage. You’ll pay a lower interest rate on reduced-risk loans, potentially saving you thousands of dollars.
- Refinance Into Better Rates and Terms. VA mortgage loans already come with some of the best available rates and terms on the market. If you are an eligible military service member or surviving spouse and originally purchased your house using a conventional loan, you may want to heavily consider refinancing into a VA-backed loan to take advantage of the competitively low rates and terms offered through the program. You may also want to consider switching from an adjustable-rate mortgage (ARM) into a fixed-rate mortgage to lock into a lower, secured interest rate. Last, switching from a 30-year mortgage term to a 15-year mortgage term can save you thousands of dollars that would otherwise be paid in interest over the life of a longer loan term.
- Renovate Your Home. Maybe you want to build out your basement, turn a sun porch into a 4-season room or remodel an outdated bathroom. Whatever the project or the reason, home renovations can lead to an increased appraised property value, increasing your home’s value in equity. Eventually, if and when you decide to sell your home, the resale value will go up too. Alternatively, home renovations can also make homes more secure and efficient, saving on energy costs or preventing potential health and insurance-related hazards. Improved quality of life is another reason home renovations are a good investment.
- Invest in Your Quality of Life or Future Financial Freedom. Investing in family vacations, or weddings or other expenditures that can raise the quality of life is a potential benefit of a cash-out refinance option. You can also use your cash-out refinance to pursue other wealth-building opportunities and financial investments. Start that small business you’ve dreamed about using your home’s built-in equity to finance it. Acquire an investment property as another source of revenue and make your dollars work for you. Ultimately, it’s up to you to decide how to play your built-in equity card with a cash-out refinance.
What Information Is Needed for a Cash-Out Refinance Calculator?
Inputs for a cash-out calculator are based on the following categories: the price and equity of your home, your home’s mortgage structure, closing costs, and other inevitable costs related to homeownership.
- Current Mortgage Balance. Your current mortgage balance consists of the outstanding principal owed on your loan and the interest rate based on that principal. Essentially it is what you still owe on your loan repayment.
- Current Home Value. This figure is based on the current appraised market value of your home. It fluctuates depending on market conditions in correlation with housing supply and demand. During times of housing scarcity, this value will increase. The old adage “location, location, location” also applies to what will determine an increase in your home’s market value, as homes in more desirable locations will fetch a higher sale price. The VA loan program’s minimum property requirements (MPRs) may seem like an upfront inconvenience due to their stricter criteria, but you may be grateful for them later if you decide to sell your home at a higher resale value.
- Cash Amount You Plan to Withdraw. The point of a cash-out refinance is to leverage your home’s built-in equity in the form of a cash-out. You will need to determine how much cash you plan to withdraw and input that value to calculate how it will affect your monthly payments. The amount of cash you wish to take out can impact your interest rate, so be sure to do your research to find out how this will affect your loan.
- Closing Costs and Fees. Usually, your closing costs and fees are bundled together and repackaged with your new loan. These expenses are then evenly dispersed throughout the term of your new loan as part of your monthly payments. Lender fees, financial report fees, title-related fees, appraisal fees, and state-specific fees are potential costs and fees that may be included. These fees typically add up to roughly 3% based on your total loan refinance amount.
- VA Funding Fee. This fee is unique to the VA loan program and was instituted to allow future eligible military service members to benefit from the advantageous rates and terms of this entitlement program. First-time usage of a VA loan is charged at a rate of 2.3% of the loan amount. An example of this on a cash-out refinance would be if you were refinancing from a non-VA loan into a VA-backed cash-out refinance loan. If you have already used your VA home loan benefit previously, subsequent usage charges a funding fee at a rate of 3.6%.
How Can Hero Loan Help?
Hero Loan was created to specifically address the home loan needs of our veterans and military service members. It is our mission to ensure that you have the necessary financial tools and guidance to put yourself in a better position financially through a refinance option. Our team of friendly lending experts provides our military service members and their families with an individualized customer-service experience making your cash-out refinance process as painless and efficient as possible.
Use this online calculator to estimate how a cash-out refinance option can be used to achieve your financial goals. Call and speak with one of our lending representatives at 866-221-8733 to get a more in-depth analysis of how you can take advantage of your home’s built-in equity with a cash-out refinance. Or, speak with us through our online chat service to find out how you can obtain a cash-out refinance loan and create a financial plan of action.