A Cash Out Refinance There may be a lower interest rate on your mortgage for your home and may allow you to take out some of the equity in your home. However, a cash-out refinance has many long-term effects for retirees living on a fixed income. Let’s look at the advantages and disadvantages of starting a cash out refinance in retirement, and compare it to other home loan options.
What is a cash out refinance?
Refinancing more than cash on your mortgage is a new loan to your loan. The new loan covers what you currently owe on the home and includes a portion of the equity in your home. You receive an equity share in cash.
For example, suppose your home is valued at $ 250,000 and your current mortgage balance is $ 150,000. This means that you have $ 100,000 equity in your home. You can refinance $ 150,000, which you still pay, plus some additional equity. Your new loan can be for $ 200,000, and you will receive $ 50,000 in cash for that amount.
Cash out refinance will include new terms to pay off the loan. There is usually a long payment plan, such as 15 to 30 years. There is also a limit to the equity you can take out of the home. Typically, “a cash-out refinance allows borrowers to take up to 80% of the value of their home in cash,” says Benjamin Scandelson, a loan promoter and head of marketing at MJS Financial in Boca Raton, Florida.
Benefits of cash out refinance
Perhaps the biggest advantage of a cash out refinance is that it allows you to use unsold equity in your home. “Cash out refinancing can be an attractive option if you want to convert your home equity into lump-sum cash,” says Casey Marks, founder and president of Crown Haven Wealth Advisors in Carmel, Indiana. There is no restriction on how cash can be used. You can do this Pay off high interest debt Like credit card debt or renovate your home.
If you currently have a higher interest rate on your mortgage, the new loan may have a lower interest rate. “A cash-out refinance will likely lower your current mortgage interest rate,” Marx says.
Drawbacks of a cash out refinance
The potentially long terms of a new loan can be a significant disadvantage for retirees. For example, if you use a cash out refinance to get a 30-year loan at age 65, the loan will not be repaid until you turn 95. “The borrower starts a brand-new mortgage term at a higher mortgage amount.,” Marx says.
There are also expenses involved with completing the transaction. “Closing costs for new loans can be 5% to 6% of the loan amount,” says Shandelson.
If you refinance cash out, you cannot leave your house to the heirs. The amount of a cash out refinance increases loan For home. New loan, or it may take several years for your repayment the heir The house may need to be sold to pay off the remaining mortgage.
How to Refinance a Cash Out Compared to Other Options
A cash out refinance is not the same as refinancing your home. When you refinance, you take out a new loan on your home, but you do not use any equity in cash. Say your house is valued at $ 200,000 and you have a $ 100,000 mortgage. You can refinance for $ 100,000 with a new loan that offers a lower interest rate.
A cash out refinance is also different from a reverse mortgage. With a reverse mortgage, “Instead of paying the monthly mortgage bill, the bank will pay you for equity in the home,” says Scandelson. “After you pass away, the bank gives your family the option of keeping the house or pledging it to the bank.”
Another option to consider is a domestic equity line of credit. A HELOC operates in a way that is similar to a credit card. Instead of receiving lump sums, you draw the funds when you need them to cover costs, and then pay the remaining amount.
What to consider before getting a cash out refinance
Think about what you want to use for your lifestyle and any upcoming changes that you anticipate. “Retirees should start with a budget for equity and a retirement plan,” says Chris Keller, partner at Kingman Financial Group in San Antonio, Texas. “Be sure to understand your goals, your money, the legacy you will leave and how it will affect your future.”
You also want to sort through other options to access money. You can decide to sell your current home Downsizing, Increase income by receiving income Other job or Reduce current expenses To release the funds.