{"id":39103,"date":"2024-03-11T15:39:27","date_gmt":"2024-03-11T15:39:27","guid":{"rendered":"https:\/\/www.miamiherald.com\/banks\/?p=39103"},"modified":"2024-09-18T19:27:59","modified_gmt":"2024-09-18T15:27:59","slug":"cash-out-refinance-pay-off-debt","status":"publish","type":"post","link":"https:\/\/www.miamiherald.com\/banks\/mortgage-refinance\/cash-out-refinance-pay-off-debt\/","title":{"rendered":"Cash-Out Refinance to Pay Off Debt: Is It The Right Move for You?"},"content":{"rendered":"

Are you saddled down by debt? If so, you may be eligible for a cash-out refinance to make your debt load more manageable<\/a>. But is this a smart financial move? It depends on your financial situation. <\/p>

Here\u2019s what you need to know about cash-out refinances<\/a>, along with their key benefits and drawbacks, to decide if they\u2019re a viable option for meeting your debt payoff goals. <\/p>

What Is a Cash-Out Refinance?<\/strong><\/h2>

A cash-out refinance is a type of refinance loan<\/a> that lets you swap out your current mortgage for a large one and receive the difference in cash. The amount you\u2019re approved for is based on your home\u2019s equity, which is the percentage of your home you own outright. <\/p>

You can calculate this figure by subtracting the outstanding mortgage balance from the property value. <\/p>

Can You Cash-Out Refinance to Pay Off Debt?<\/strong><\/h2>

Lenders do not impose spending restrictions on cash-out refinances, which can be a strategic tool for consolidating credit card debt<\/a> and other high-interest debt. <\/p>

Basic Considerations<\/strong><\/h3>

Before paying off debt with a cash-out refinance, consider the amount of equity in your home to gauge if it\u2019s enough to cover your debts. The amount of cash you can pull out is generally limited to 80 percent of your home equity, so having a cushion is ideal to make this approach worthwhile. <\/p>

Also, compare the interest rates on your current debts and the cash-out refinance to ensure the latter is lower. And don\u2019t forget to consider closing costs<\/a>, which are usually two to six percent of the loan amount. <\/p>

Another important factor to consider is the new loan term. A more extended repayment period means you\u2019ll spend more time paying off your home, and the increase in borrowing costs could be substantial. <\/p>

Practical Example<\/strong><\/h3>

Assume you owe $175,000 and have a home worth $350,000. If the lender lets you borrow up to 80 percent of your home\u2019s value, you can get a cash-out refinance of $280,000 ($350,000 * .80). <\/p>

Once the loan closes and funds, the lender will pay off your current mortgage of $175,000 and disburse the remaining $105,000 to you. You can use these funds to pay off debt or meet other financial goals. <\/p>

Eligibility and Qualifications for Cash-Out Refinancing<\/strong><\/h2>

Lenders consider three primary factors when you apply for a cash-out refi<\/a>.<\/p>

Debt-to-Income (DTI) Ratio<\/strong><\/h3>

Your DTI ratio is the percentage of your monthly gross income used to cover debt obligations. Most lenders prefer a DTI under 43 percent, although some offer a bit more flexibility. But if it\u2019s much higher, the lender may assume you\u2019re overextended and deny you a loan. <\/p>

Credit Score<\/strong><\/h3>

A strong credit score<\/a> opens the door to better approval odds and loan terms on a cash-out refi. You can access a cash-out refinance with a score of 620 or higher (or 580 for FHA loans), but a 680 is preferred. Be mindful that your credit score directly impacts your mortgage rate and overall borrowing costs. <\/p>

Home Equity<\/strong><\/h3>

As aforementioned, lenders commonly allow you to borrow up to 80 percent of your home\u2019s value, including your current mortgage and the new cash-out amount.<\/p>

How to Apply for a Cash-Out Refinance<\/strong><\/h2>

Here\u2019s a breakdown of what to expect when you apply for a cash-out refinance: <\/p>