Many homeowners struggle with high-interest credit card debt that can be hard to pay off. One possible solution is to use a cash-out refinance, which allows you to tap into your home equity and get cash that you can use to pay off your credit cards or other debts. In this report, we will discuss how a cash-out refinance works, and what are the benefits.
How a cash-out refinance works
A cash-out refinance is a type of mortgage refinancing that lets you convert home equity into cash. Home equity is the difference between the current value of your home and the amount you owe on your mortgage. For example, if your home is worth $300,000 and you owe $100,000 on your mortgage, you have $200,000 in home equity.
To do a cash-out refinance, you need to apply for a new mortgage that is larger than your current balance. The difference between the two mortgages is given to you in cash at closing. For example, if you want to get $30,000 in cash, you will refinance your $100,000 mortgage into a $130,000 mortgage and receive $30,000 in cash.
However, you cannot cash out all your home equity. Most lenders limit the amount you can borrow to 80% of your home’s value. This means that you need to keep at least 20% of your home equity as a cushion. For example, if your home is worth $300,000, the maximum amount you can borrow is $240,000. If you owe $100,000 on your mortgage, the maximum amount you can cash out is $140,000.
The terms of your new mortgage may be different from your original loan. You may get a lower or higher interest rate, a longer or shorter loan term, or a different type of loan (such as fixed-rate or adjustable-rate). You will also have to pay closing costs and fees, which typically range from 2% to 6% of the loan amount.
Benefits of a cash-out refinance
A cash-out refinance can help you pay off your credit card debt or other high-interest debt by giving you access to a large sum of money at a lower interest rate. Credit cards usually charge interest rates of 20% or higher, while current mortgages have much lower rates, usually below 7.750%. By paying off your credit cards with a cash-out refinance, you can save money on interest and reduce your monthly payments.
Another benefit of a cash-out refinance is that it can improve your credit score by lowering your credit utilization ratio. This is the percentage of your available credit that you are using. For example, if you have $10,000 in credit card limits and $5,000 in balances, your credit utilization ratio is 50%. A high credit utilization ratio can hurt your credit score because it indicates that you are relying too much on debt. By paying off your credit cards with a cash-out refinance, you can lower your credit utilization ratio and boost your credit score.
Contact me if you would like to take advantage of a cash-out refi!
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