The cash out refinance can be an effective financial tool when used properly. How it works is a new loan is taken out for a greater amount than the current loan. The money from the new loan is used to pay off the old loan and sometimes costs associated, and the extra money is used for basically anything the borrower wants to use it for.
In contrast to a cash-out refinance, a standard rate/term refinance will serve a slightly different purpose. The standard rate/term refinance is essentially just that, one that has a purpose of changing the rate, or changing the term. For example, a borrower may be in a 30 year loan but their goal is to pay the home off in 15 years. They may refinance and change their standard monthly payment to that of the 15 year, which usually carries with it lower rates than a 30 year loan. This is due to the time value of money and risk level associated with the different term lengths. If the borrower is in an adjustable rate mortgage, they may refinance into a fixed rate mortgage so they are able to enjoy predictable payments.
Ever since the most recent financial crisis interest rates have been on a steady trend downward to the record lows at the time of this writing. The interest rates were brought downward in order to stimulate what could have been a severe depression. Consequently, at the time of this writing we are still very close to historic, record lows, but the federal reserve has indicated that they plan to move back upward toward the natural range that would be expected in a free market, without a stimulus.
If we were to compare the interest rates on a home loan vs the interest rates of a credit card, or even a personal loan, the difference should be very apparent. Home loans are usually able to command a much lower interest rate than that of a credit card or a personal loan because they are secured by real property which means less risk associated for the lenders.
Some home owners have a bunch of untapped equity in their home. This equity can sometimes be put to work by using a cash out refinance to free up a significant amount of cash flow by consolidating debts. Sometimes it makes financial sense to trade high interest for low interest debt and possibly even pay the home off more quickly. If you are concerned about closing costs, most lenders are able to offer no cost options.
Homeowners are able to use the loan programs such as home equity loans, second mortgages, and cash-out refinances in order to add solar panels and save money on energy, for home improvements such as remodel or room additions, and possibly even adding value. Depending on your goals, it may make the most sense to save the cash out of pocket, which can sometimes be in the tens of thousands of dollars, and use home equity instead. Make sure you are taking your long term and short term goals in to account when you make these decisions. An experienced loan professional may be able to help.
In contrast to a cash-out refinance, a standard rate/term refinance will serve a slightly different purpose. The standard rate/term refinance is essentially just that, one that has a purpose of changing the rate, or changing the term. For example, a borrower may be in a 30 year loan but their goal is to pay the home off in 15 years. They may refinance and change their standard monthly payment to that of the 15 year, which usually carries with it lower rates than a 30 year loan. This is due to the time value of money and risk level associated with the different term lengths. If the borrower is in an adjustable rate mortgage, they may refinance into a fixed rate mortgage so they are able to enjoy predictable payments.
Ever since the most recent financial crisis interest rates have been on a steady trend downward to the record lows at the time of this writing. The interest rates were brought downward in order to stimulate what could have been a severe depression. Consequently, at the time of this writing we are still very close to historic, record lows, but the federal reserve has indicated that they plan to move back upward toward the natural range that would be expected in a free market, without a stimulus.
If we were to compare the interest rates on a home loan vs the interest rates of a credit card, or even a personal loan, the difference should be very apparent. Home loans are usually able to command a much lower interest rate than that of a credit card or a personal loan because they are secured by real property which means less risk associated for the lenders.
Some home owners have a bunch of untapped equity in their home. This equity can sometimes be put to work by using a cash out refinance to free up a significant amount of cash flow by consolidating debts. Sometimes it makes financial sense to trade high interest for low interest debt and possibly even pay the home off more quickly. If you are concerned about closing costs, most lenders are able to offer no cost options.
Homeowners are able to use the loan programs such as home equity loans, second mortgages, and cash-out refinances in order to add solar panels and save money on energy, for home improvements such as remodel or room additions, and possibly even adding value. Depending on your goals, it may make the most sense to save the cash out of pocket, which can sometimes be in the tens of thousands of dollars, and use home equity instead. Make sure you are taking your long term and short term goals in to account when you make these decisions. An experienced loan professional may be able to help.
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