No wonder the sun and beautiful beaches are common benefits of living in the Sunshine State. But did you know that owning a home in Florida may have made you richer?
According to the latest report from Freddie Mac’s Housing Price Index, Florida homeowners’ property values have increased by over 81% in five years. So, if you’re wondering if cash refinancing is worth it, it might be.
But before tapping into your home equity, it’s essential to gather information about this financial decision and how refinancing works before taking the plunge. Keep reading to understand better your cash refinancing opportunities.
Financial Considerations of Cash Refinancing
The decision to cash refinance should not be taken lightly. You must carefully evaluate your current financial situation. It’s important to remember that cash refinancing is a new mortgage.
In this case, you will no longer have your original mortgage but a new one with a new interest rate. The total loan amount will increase, and a new monthly payment will be required.
How long it takes to refinance your home can depend on how prepared you are. Before starting the cash refinancing application process, make sure to consider the following:
- Credit Score
- Debt-to-Income Ratio (DTI)
Lenders usually require a minimum credit score of 620 for conventional and VA loans. However, FHA loans require a credit score of 580. Note that credit score requirements may vary depending on your lender.
In most cases, you should have a Debt-to-Income Ratio (DTI) below 40%. It’s important to note that DTI requirements vary by lender. Some lenders allow cash refinancing with a DTI of up to 50%.
Advantages of Cash Refinancing
Here are some advantages of applying for cash refinancing to help improve your personal finances.
Access to Cash
Cash refinancing is a great way to obtain a significant amount of money that you can use for other purposes. Lenders usually require a loan-to-value ratio of 80% or less for cash refinancing.
This means you’ll need to have at least 20% equity in your home to be eligible for assistance. If you have accumulated a significant amount of equity in your home, cash refinancing can be a good way to access the money you need.
Increase the Value of Your Home
Cash refinancing allows you to access the equity in your home. You can add significant value to your home by renovating the kitchen or adding a new bathroom. These home improvements can increase its overall value.
Additionally, if you use the proceeds from your cash refinancing to make improvements to your home, you may benefit from a tax deduction.
Lower Interest Rates
Refinancing your mortgage can save you money with a lower interest rate. A fixed-rate with a 30-year mortgage provides a stable and predictable monthly payment. Personal loans and credit cards have variable interest rates.
Long amortization period
The amortization period for a refinanced mortgage is up to 30 years. In contrast, personal loans usually last between 12 and 60 months. Some lenders may offer repayment terms of up to seven years for personal loans.
Tax Deductions
Home improvement or capital investment, such as upgrading to energy-efficient windows or adding a room, is tax-deductible. These tax deductions are available and can be beneficial in the future.
Mortgage Debt Is Not Bad Debt
Mortgage debt has historically been considered “good debt” for many reasons. A mortgage is often used to create wealth with the help of home equity, fund retirement accounts, and start businesses.
Debt Consolidation
Getting rid of credit card debt is always a good idea, and cash refinancing can check that off your list. Defaulting on a credit card will affect your credit score and reputation. Defaulting on a mortgage leads to foreclosure.
Improved Credit Score
If you decide to pay off high-interest debts like personal loans and credit cards, your credit utilization will decrease. Your credit score will improve due to this decrease in credit utilization.
Cons of Cash Refinancing
Cash refinancing has several advantages, such as accessing a lump sum of your home’s value. But there are also some drawbacks.
More Debt
Your monthly payment will increase compared to your current mortgage. Keep in mind that the amount of money you receive will increase your debt. Before taking on more debt, weigh the risks.
Increased Interest Costs
Cash refinancing can be beneficial if it provides a lower interest rate or a comfortable increase in your monthly payment. Consider all your options if a higher interest rate does not help your financial situation.
Foreclosure Risk
According to Atton, a real estate and property data company, foreclosures in Florida increased by 124.5% in the first six months of 2022. In June 2022, 17,624 Floridians lost their homes due to foreclosures.
As a homeowner, you deserve to leverage your equity to make improvements and seize ideal financial opportunities. But consider all your options to avoid foreclosure.
Closing Costs
It’s common for homeowners to wonder, “How much does refinancing cost?” Closing costs typically range from 2% to 6% of the loan amount. Closing costs include origination fees, credit check fees, and appraisal costs.
Need for Sufficient Equity
To receive cash refinancing, you need to have a minimum of 20% home equity. The loan-to-value ratio (LTV) is usually not higher than 80%.
Unexpected Tax Liabilities
Consult your accountant or tax professional about possible tax obligations. However, the IRS does not consider cash refinancing as income but as a loan.
Is Cash Refinancing Worth It?
Reviewing your current mortgage and financial goals is a priority. Take some time to research the local real estate market to estimate your home’s value. Use your research to determine if refinancing your property is worth it.
Cash Refinancing vs. No Cash-Out Refinancing
Cash refinancing allows you to obtain a new loan for an amount higher than what you owe on your current mortgage and receive the difference in cash.
Usually, a no-cash-out refinance focuses on reducing the interest rate on your current mortgage. No-cash-out refinancing also offers the opportunity to eliminate private mortgage insurance (PMI).
Alternatives to Cash Refinancing
If a lower interest rate is not your goal, and increasing your mortgage balance is not your intention, there are alternatives.
When you take out a second mortgage while keeping your first mortgage, you are taking out a line of credit against your property. This is called a Home Equity Line of Credit (HELOC).
Unlike a 30-year fixed-rate mortgage, this type of loan has a variable interest rate that fluctuates with the current market.
Another option is a home equity loan. A home equity loan has a fixed interest rate that is paid in a lump sum. Both a home equity loan and a home equity line of credit require a higher interest rate compared to cash refinancing.
If you are 62 years or older, you may consider a reverse mortgage. A reverse mortgage does not require any monthly payment. However, it will need to be repaid or the home sold after leaving it.
Contact Us to Discuss Your Options
Now that the pros and cons of cash refinancing have been explained, it’s time to weigh your options.
That’s where we come in. We can help you determine if cash refinancing is right for you and guide you through the process. There will be no unanswered questions. So feel free to ask.
Submit your application now to start working today.
