Cash-strapped, financially stretched, and desperate for a solution – these three phrases, more than any other financial terms, accurately describe the average professional today. Loaded with debt or long-term financial commitments, unable to improve their career or expand their salary, and in the search for a solution, they’re part of history’s most financially strained and stressful generation.
It’s a tough setting to understand, particularly when the years leading up to the recent financial crash are observed. With stable careers and steadily increasing incomes, it’s easy to point out that many of those that are in the worst financial shape today had little idea of the incoming downturn. They were used to working for their money, with their income gradually increasing over time.
While many of these cash-strapped professionals have little in the way of savings or cash flow, most of them have one thing – a house – thought by many to be the cause of the economic downturn at its early stages. While rarely paid for and almost always financed for decades at a time, this property is of value for its owners, both as a long-term investment and as a way of generating cash flow.
Mortgage refinancing is a term that few homeowners want to hear. It conjures images of an even longer repayment period, pictures of lengthy bills and higher interest rates, and even the possibility of being in debt for a greater amount of time. But there’s one form of mortgage refinancing that is of very real value to struggling, home-owning professionals – cash-out mortgage refinancing.
Let’s look at cash-out mortgage refinancing on its face – it’s an innovative, if somewhat tricky, way to take out cash against the value of your home. But unlike an equity release, which forfeits a small amount of your equity in your home, cash-out mortgage refinancing simply adds a small amount to your loan’s balance. Often, it involves the creation of a second, external loan alongside yours.
What does this mean? It means that, assuming you have a remaining balance of $100,000 on your mortgage, you could refinance it at a greater balance – perhaps $125,000 – and potentially a lower interest rate. This has two effects – the first is that you’ll now have a greater amount of cash in your immediate reach than before. The second is that you’ll have it loaned at a much lower interest rate.
This produces two key advantages. The first of these is that, by extending your loan’s balance by refinancing it, you’ll give yourself an extra $25,000 – on credit, of course – to spend on the cost of sending your kids to college, purchasing a new vehicle, or simply improving your home. This is of key importance – without cash flow, even an efficient cost-based lifestyle can come to an end.
The second is that, because your loan’s balance is now greater than before, you’ll be able to secure a lower interest rate than you may have had on your previous mortgage’s balance. This gives you the advantage of borrowing in bulk – despite the larger balance of your loan, and thus the greater the amount that needs to be repaid, your total interest payments are likely to remain the same as before.
In effect, the difference between your pre-refinancing loan – or your ‘old’ mortgage – and your new loan, is a low-interest, or even interest-free, remaining balance. This is such a powerful option as it’s able to be used as an investment – perhaps in education or your child’s future – to purchase essential items for your family, or even to make changes in your life or begin a new business.
While this may sound relatively similar to extracting equity in your home, it’s important to keep in mind that there are a few key differences between the two processes. An equity extraction requires an additional loan on top of your mortgage – this loan is made against the equity in your property itself. As such, it’s a slightly more complex, and less financially sensible, option for homeowners.
With cash-out mortgage refinancing, however, you’re modifying your existing loan – refinancing it and changing the terms of your borrowing. As such, you’re neither taking on any additional loans or cutting down the balance of your first. It’s a balance between the size of the loan and its interest rate – securing a lower interest rate can often make a larger loan ‘smaller’ in its month-by-month costs.
Like other forms of home refinancing and mortgage modification, cash-out mortgage refinancing is not necessarily an ideal long-term option. You do have a greater loan balance, at the end of the day, and that requires some careful attention over the long term. If you have minimal ongoing expenses and little reason to need greater cash flow, then it’s often best to stick with your current home loan.
However, if you’re in need of a short-term cash injection, whether for your personal life or for the early stages of an investment, cash-out mortgage refinancing is a fantastic way to secure your cash at a relatively low, if not non-existent, interest rate. As with all refinancing schemes, research your options in advance. With the right outlook, assistance, and home loan, you could end up saving a substantial amount of money over the long term.