With August underway, homeowners are turning their attention from exciting summer outings and vacations to the return of regular fall routines. As back-to-school season begins for millions of Americans, many find themselves faced with the daunting challenge of new tuition fees or resuming student loan payments amid the complex backdrop of inflationary pressures.
The financial uncertainty of the season may leave many looking toward alternative sources and methods to find financial security. Luckily, homeowners have an option to receive cash upfront to help offset the cost of tuition or student loan payments. If you own a home and have equity in it, a cash-out refinance could be the answer.
What is it and why?
A cash-out refinance converts the equity built in a home into a lump sum payment of cash. This is achieved by taking out a new home loan at a higher amount than what’s currently owed on the mortgage. It’s used to pay off the old loan, and the difference between the old balance and what was borrowed on the new loan is paid in cash.
Borrowers aren’t limited to using the funds just for educational purposes – a cash-out refinance is often used to pay down debt, upgrade home appliances, make home repairs, start a business, invest in real estate and more.
It’s important to note, with a cash-out refinance, the amount you’re able to borrow is reliant on the amount of equity in your home. Homeowners must have at least 20% home equity to be considered.
Additionally, since the amount borrowed has increased, monthly mortgage payments may also increase. But for many homeowners, the increase in monthly mortgage payments could be less than the prospective debt that may otherwise be taken on.
What about rates?
Some homeowners may try to time the market to reach their target interest rate. But certain things in life, such as schooling, don’t wait around for the perfect timing. If you’re planning to take on debt regardless, it’s smarter to choose the least expensive way to borrow.
A cash-out refinance is likely to give a lower interest rate than other methods of borrowing, such as personal loans, credit cards and even home equity loans. With the average credit card interest rate in 2023 reaching a whopping 24.52% according to Forbes, borrowing smarter could make a cash-out refinance your financial savior.