Congratulations! You’ve paid off half your mortgage! Your home has appreciated and you now own equity in your home.
But you need to remodel your business and you have to make payroll this month. You don’t have enough money saved up. What do you do?
You could call your estranged rich Uncle, but your father would probably disown you if he found out.
There is one option. Cash out refinancing.
Here’s why this type of refinancing might work for you.
1. How is Cash Out Refinancing Different?
Refinancing on your home means replacing your current mortgage with a new one. Why would you want to replace your mortgage? There are a couple of reasons.
You might have begun a new relationship, married someone perhaps, and you want to add them to the loan and title. You also want to take advantage of a lower interest rate when national rates drop.
You don’t need equity in your home yet to take advantage of a traditional refinance loan. But with a cash out, you often need some equity in your home before you are approved.
With a traditional mortgage refinance, you replace your current mortgage with one the same price as the previous mortgage. With cash out, you replace it with a larger mortgage and you get the overage cash to do with as you please.
2. The Pros of Cash Out
There are other options for borrowing against your house other than cash out. You could apply for a HELOC or a line of credit which uses your house as collateral. You could apply for a home equity loan which is a second mortgage on your home that takes advantage of your equity.
A cash out gives you a lower interest rate than either of these options. You could even secure a lower interest rate than your original mortgage (not common but possible).
This shouldn’t be the sole reason you do a cash out. You’d be better off doing a traditional refinance.
You can easily use a cash out to consolidate other higher-interest debt. Credit card debt can be an atrocious burden. If you have multiple credit cards with high balances, you can pay off those cards with the extra cash from a cash out.
This way, you can improve your credit score. Credit agencies take into account your credit utilization ratio. If it’s too high, your credit score drops.
Using a cash out refinanced mortgage to finance your business is only a good idea if you absolutely can’t get an SMB loan. An SMB loan would have a much lower interest rate.
Do Your Research
A cash out refinancing of your home could dig you out of debt or improve your home. You could use it to fund your child’s education. And it could be useful to fund your business.
Do your research. Don’t be saddled with more debt than you can handle.
You should always try for a business loan first. If you’re ready, apply for an SMB loan today.