Why Consider a Cash-Out Mortgage Refinance?
Maybe you want to do a home renovation or go back to school. Perhaps you’re looking to put a down payment on an investment property (or assist a family member with their down payment), or pay off an existing debt.?
With an influx of cash in hand, you could do that. But before you go running off to the bank, there are some important considerations.
1. The terms of your mortgage will change.
A cash-out mortgage refinancing will increase the amount you owe. If your mortgage is $300,000 now and you want to pull $100,000 out of your equity, your mortgage will jump to $400,000, as will the interest you owe.
To cover this, one of two things will happen: you’ll either have to increase your monthly payment or lengthen the amortization (or a combination of the two).
TIP: Use this to see what your new mortgage payments would look like after refinancing.
So you’ll have to look at your finances and decide which makes most sense for you. Most experts will tell you that the you can pay off your mortgage, the better. But others will tell you to use that money for other obligations or opportunities, especially since you’re presumably going to be paying your mortgage off over decades, and at historically low mortgage rates.
2. You’ll have to re-apply.
A refinancing of your mortgage results in a new mortgage, so you’ll have to produce all the documentation your bank or mortgage broker requires to approve you. This will include a check of your credit score, income statements and other personal financial records and, if you own a business, your company’s financials as well.
The less cash you plan to take out, the easier this process will be. But you will still have to demonstrate that you’re able to manage the new debt you’re taking on.
This brings us to the most important consideration:
3. Don’t bother with cash-out refinancing if you plan to rack up more consumer debt.
A minority of homeowners may be tempted to use their new-found funds as a way to indulge in some long sought-after purchases or that dream vacation. You should be using your home equity as a way to improve your overall financial situation:
A home renovation that will increase the value of your home
Education that can increase your earning potential
An investment property that will grow your monthly income
High-interest debt repayment that will lower your monthly expenses.
These are all good reasons to consider cash-out mortgage refinancing.
But remember, recent government mortgage changes mean you need at least 20 per cent equity in your home before you can even consider refinancing.