How to Tap Into Your Home Equity With A Cash-Out Refinance

Are you a homeowner who’s looking for ways to tap into your home equity and considering a "cash out refinance"? Maybe you need some money for big home renovations or to fund your child’s post secondary education. Or perhaps you want to pay down your high interest credit card debt. A cash-out refinance, or equity takeout, can provide you with a lump sum of money but it also comes with some potential downsides.

In this post, I’ll outline the pros and cons of a cash-out refinance so you can make an informed decision about whether it's the right choice for your financial situation.?

What Is a Cash-Out Refinance?

A cash-out refinance allows homeowners to replace their current mortgage with a new one for a larger mortgage, giving them access to a lump sum of cash. The amount you can borrow is based on the equity you've built in your home and can be used for home improvements, debt repayment, or investments.

A standard refinance involves replacing your mortgage for a lower interest rate, a longer amortization, or adding/removing a co-signer. A cash-out refinance consists of borrowing more than your mortgage's remaining balance. The difference between your new mortgage amount and your current balance will be paid out to you in cash.

How Much Money Can You Get with a Cash-Out Refinance?

The maximum amount you can borrow with a cash-out refinance in Canada depends on a couple of factors. If you're getting a regular mortgage loan, you can borrow up to 80% of your home's total value.?

Let's say your home is worth $500,000 and you still owe $300,000 on your current mortgage. That means you have $200,000 in home equity (the value you've built up). With an 80% cash-out refinance, you could get a new mortgage for up to $400,000 (80% of $500,000). After paying off your existing $300,000 mortgage, you'd get around $100,000 in cash.

The exact amount you can borrow also depends on your lender's requirements and your home's appraised value. Working with a mortgage broker, you can find the best lender and mortgage rates if you’re interested in refinancing your home.

What's the Difference Between a Cash-Out Refinance and a Regular Refinance?

When you refinance your mortgage, you're basically getting a new loan to replace your old one. The main difference between a regular refinance and a cash-out refinance is what you do with the new loan.

With a regular refinance, you're typically just trying to get a lower interest rate or change the terms of your mortgage, like extending the repayment period. The new loan amount is about the same as what you currently owe. On the other hand, a cash-out refinance lets you borrow more than the current balance on your mortgage which is given to you as a lump sum.

What Are The Pros and Cons of a Cash-Out Refinance

Pros:

• You can get your hands on a significant amount of cash, up to 80% of your home's value
• Interest rates are usually lower than other loan options like personal loans or credit cards
• You can use the money to pay off high-interest debts and save on interest costs
• The cash you receive is considered debt, not income, so it's tax-free

Cons:

• Your mortgage balance will be higher, leading to bigger monthly payments
• If you extend the repayment period, you may end up paying more total interest over the life of the loan
• It will take you longer to fully pay off your mortgage and become debt-free
• If you can't make the higher mortgage payments, you risk losing your home to foreclosure

Smart Ways to Use a Cash-Out Refinance

There are several reasons to borrow on the equity of your home. Here are some wise ways you can use the money you get from a cash-out refinance that will pay off in the future:

Home Improvements: Using the cash to renovate or upgrade your home can increase its value and grow the equity you have even more.

Paying Off Debts: You can use the money to pay off high-interest debts like credit cards, personal loans, or lines of credit. This can save you from paying a lot of interest in the long run.

Investing: Some people use the cash to invest in things like a business, the stock market, or even a down payment on a second property.

Education Costs: The money can also help cover big expenses like your child's post secondary education.

Other Options Besides Cash-Out Refinancing

While a cash-out refinance can be a good way to access the equity in your home, it's not the only choice. There are a few other alternatives that might work better depending on your situation:

Reverse Mortgage: This is an option for Canadians 55 and older. It lets you access your home's equity without having to make monthly mortgage payments, which can be helpful for retirees.

Home Equity Line of Credit (HELOC): This works like a credit card - you can borrow against your home's equity as needed and only pay interest on the amount you actually use.

Home Equity Loan: This is a separate loan that's secured by the equity in your home. It gives you a lump sum of cash without replacing your existing mortgage.

Is A Cash-Out Refinance Right For You? Call Me To Find The Best Alternative And The Lowest Interest Rates.?

A cash-out refinance lets you leverage your home equity for various purposes, however, it’s important to carefully weigh the pros and cons, consider your financial goals, and explore alternatives before deciding which mortgage solution is right for you. Working with a trusted mortgage broker, like me, helps you understand the potential risks and benefits of cash-out refinancing.?

Are you looking to access your home’s equity? Let’s sit down together and review your financial plan then look for the best options and interest rates for your situation. Give me a call at 705-315-0516 or book a consultation today.