With mortgage rates at a reasonable level, many homeowners are thinking about refinancing their home at a lower interest rate, followed by using that money to pay back their debt. This type of refinancing, known as “Cash-Back Refinancing,” is becoming an increasingly popular option for home owners. At this point, you’re probably wondering: “Is this refinancing option still available? And is it right for me?” Keep reading as we’ll be answering both of these questions in the sections below.
The Short Answer – Yes
Not only does cash-back refinancing exist, but it’s also an excellent way to get your hands on some cold hard cash (which can then be used to pay off any existing debt you have). On the surface, it seems like an incredibly attractive deal. For instance, if your credit card interest rate is 10%, and your refinancing rate is 5%, you’ll actually be saving money by paying off your credit card debt using your mortgage loan. But as with most things in life, there are a few potential drawbacks that you should be aware of.
Cash-Back Refinancing Only Works If…
This option only works if you pay back your mortgage loan each month without fail. After all, with this method, you are assuming more debt, and if you miss a payment then this is going to negatively impact your credit score.
How Do Cash-Back Refinance Loans Work?
The process isn’t as complicated as you might think. Here’s an example: let’s say that you owe $50,000 on your 30-year fixed-rate mortgage loan. You have five years left on your loan. By opting for a cash-out deal, you can get a $100,000 cash-back, and then use 50% of that amount to pay off the old home loan. The remaining $50,000 can be used for whatever purpose you’d like, in which time you now owe $100,000 on your home, but at a lower interest rate than you were previously paying.
Borrow With Modesty to Avoid Trouble
The potential trouble comes when people take out a much larger loan than they actually need. For instance, if you only need $10,000 to pay off some credit card debt, then only borrow that amount (or at the very least go for a more modest loan amount). Your lender will give you information regarding exactly how much home equity you’ve accumulated over the years. Depending on who your lenders is, they’ll allow you to borrow anywhere from 8% to 125% of your home’s value.
As you may have guessed, to qualify for higher amounts, you’ll need to have a solid credit score (higher scores are associated with higher amounts, and vice versa). Anyway, make sure that you “get all your ducks in a row” before opting for such a deal. This means that you should shop around until you find the best offer. And remember, don’t go using your money for big vacations and fancy boats – this is how people get into trouble. If you need the money to pay off real debt, like school loans or credit cards, then refinancing your home for some extra home is definitely a solid option to consider.