What is cash-out refinancing, and how does it help you?

What is cash-out refinancing, and how does it help you?

Looking for ways to diversify your investments by buying an investment property or shares? You may be considering refinancing. 

You may even be thinking of renovating, expanding your kitchen or perhaps adding a new room. All of these are ways you can leverage the equity you’ve built in your house and use the cash to build wealth. 

Refinancing your home loan can sometimes also be called cash-out refinancing. This basically means that you’re tapping into your home equity by refinancing your mortgage for a larger one, allowing you to take out the extra money as cash. 

For example, suppose you took out a $400,000 mortgage to buy a property worth $500,000 several years ago. Presently, you’re left with an outstanding debt of $200,000. Assuming that the property’s value has not fallen, you’ve built up $300,000 in home equity. Now, you want to convert $50,000 of your equity into cash to pay for a home renovation project you’ve been planning. 

One of the options that you may be able to consider is to refinance your home loan to access this equity. If you choose this option, you can take out a new mortgage of $250,000. The new mortgage would include the $200,000 outstanding from your original mortgage and the $50,000 that you’ve taken out as cash.

Some lenders will let you access the money as a flexible line of credit instead of a lump sum payment meaning you get periodical payments when needed. Like other mortgages, the typical repayment term offered is 30 years with a choice between fixed and variable cash-out refinance mortgage rates.

Home equity loan and cash-out refinance: What’s the difference?

Cash-out refinance loans, and home equity loans are two different options to leverage the equity you’ve built in your property. 

A cash-out refinance mortgage is a brand new mortgage with a higher loan amount than what you previously owed on your house. Generally, you’ll be able to do a cash-out refinance if you’ve had your property long enough to build equity or its value has risen. 

On the other hand, a home equity loan is a second mortgage that doesn’t replace your existing mortgage. If you’re taking out a home equity loan, you’ll be taking out a second mortgage that will be paid separately, usually at a fixed rate of interest. 

While both the products let you tap into your home equity, cash-out refinances are often cheaper. This is because you’re taking out a new loan, meaning it’ll be paid off first if your property is foreclosed on or you declare bankruptcy.

What is the benefit of a cash-out refinance?

Borrowing cash while refinancing may help pay the deposit for a second property, fund a large purchase, or consolidate debts like credit cards and personal loans. You could also use the money for a home renovation project by opting for a line of credit, which is more suitable if you need the money in instalments. 

With a line of credit, you can borrow and repay the extra money on a need-basis, only paying interest on the money withdrawn by you. Some lenders will also allow you to invest the money in shares or purchase a new business, but this is decided on a case-to-case basis. It may be dependent on the level of exposure a lender is comfortable with. 

How much can I borrow with a cash-out mortgage refinance?

Typically, you’ll be able to borrow up to 80 per cent of a property’s value with a cash-out refinance loan. This means you’ll have access to the cash amount or equity that is the difference between what you still owe and 80 per cent of your property’s value. 

However, most lenders will ask you to state the purpose of the loan when applying to assess their risk. This is because lenders don’t control how you’ll use the funds once they hit your bank account. Lenders want to evaluate if you’re a mortgage holder living beyond your means. 

Your lender wants to be sure about what you’re going to do with the money before approving your mortgage refinance application. Once the money is accessible, you might be tempted to use it for other things, which could make your financial situation worse. 

Lenders also require proof that you’d be able to meet the repayments for a higher amount of debt. They want to minimise their risk while ensuring your new mortgage won’t put you under any financial stress leading to repayment issues. If you think you’re falling behind with your repayments, or looking to refinance to free up some cash for meeting your day-to-day expenses, it might be best to speak with a mortgage broker to work out a suitable option. 

Tapping into your equity may help consolidate your loans, but it might not be an effective strategy for mitigating financial stress in the long run. Also, if you’re extending the loan term, you’ll end up paying more interest, increasing the total cost of the loan. Speaking with an expert can help you make an informed decision.

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Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

Is a home equity loan secured or unsecured?

Home equity is the difference between its current market price and the outstanding balance on the mortgage loan. The amount you can borrow against the equity in your property is known as a home equity loan.

A home equity loan is secured against your property. It means the lender can recoup your property if you default on the repayments. A secured home equity loan is available at a competitive rate of interest and may be repaid over the long-term. Although a home equity loan is secured, lenders will assess your income, expenses, and other liabilities before approving your application. You’ll also want  a good credit score to qualify for a home equity loan. 

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay.