Refinance and Get Money Back
Refinancing your mortgage can be a great decision given the right set of circumstances. One of the benefits to refinancing your home loan is that it allows you to convert some of your home equity into cash - this process is sometimes called a "cash out refi." By assessing your needs and learning how to navigate the process, you can quickly learn how to refinance and get money back.
Steps
- Familiarize yourself with the mechanics of refinancing. Before you rush into a huge financial decision just to get some cash, study how the process works. Refinancing a home loan is the process of taking out a new mortgage and using it to immediately pay off the balance of your first mortgage. You are essentially swapping 1 mortgage for another.
- Determine if refinancing your mortgage will be favorable. Based on the circumstances, refinancing could be a great decision or a horrible decision. Refinancing a loan will require you to pay the lender's fees, but it may also save you money on future payments if you can get a lower interest rate. If the savings outweigh the fees, refinancing is a good call.
- Refinancing will likely benefit you if your credit rating has improved since applying for your original mortgage, interest rates are low, and you are not too close to paying off your entire mortgage balance.
- Refinancing is not likely to benefit you if your credit rating has dropped recently, interests rates are high, or you are already very close to paying off your mortgage.
- Consider alternatives. Before you refinance your mortgage, make sure another option isn't a better choice. If you need the cash for college tuition, consider a Stafford loan; these loans are easy to apply for and don't require repayment until after graduation. If you just need some flexibility, consider opening a home equity line of credit. These work like credit cards, allowing you to spend money as you choose rather than loaning you a lump sum all at once.
- Decide how much cash you need. Formulate a plan for using the money, and make sure you understand how "cashing out" will affect your equity.
- For example, suppose your original mortgage was for $200,000. Assume that this still reflects the value of your home (note that these calculations will work equally well in other currencies).
- Suppose that you have paid off $100,000 of your principle. So, you have $100,000 equity in your home and $100,000 remaining balance on your mortgage.
- When you refinance, you will take out a new mortgage in the amount of $200,000. First, you pay off the $100,000 balance on the original mortgage.
- You can essentially split your remaining $100,000 between cash and home equity. If you take $20,000 in cash, you will have reduced your home equity to only $80,000. Now your mortgage has a balance of $120,000, so it will take longer to pay off.
- Apply for a new mortgage. The process will be very similar to the 1 you followed when you took out your original mortgage. Fill out a mortgage application with your preferred lending institution, making sure to tell them you plan to convert some of your home's equity into cash.
- Submit all the documents required by your lender. These will generally include W-2s, pay stubs and income tax forms from previous years.
- Get your home appraised. Lenders require home appraisals to make sure they aren't lending you more money than the home is worth. The appraiser will usually be selected by your lender, and will contact you to schedule an appraisal time.
- Attend the closing. The closing will generally be held at a local title and escrow firm. You will receive your cash at the closing.
Tips
- You will generally not be allowed to refinancing your mortgage if you've been paying your existing mortgage for less than a year. This is referred to as the "seasoning" period.
- Be aware that the amount of cash you will be able to take out will be limited by your financial institution.
