By CMF Staff Writer
As back-to-school season begins for millions of Americans, many find themselves faced with the daunting challenge of new tuition fees or resuming student loan payments amid the complex backdrop of inflationary pressures.
The financial uncertainty of the season may leave many looking towards alternative sources and methods to find financial security.
Luckily, homeowners have a ready-made option to receive cash upfront to help offset the cost of tuition or student loan payments. If you own a home and have equity in it, a cash-out refinance could be your saving grace!
What is it and Why?
A cash-out refinance is when you convert the equity you have built in your home into a lump sum payment of cash. This is achieved by taking out a new home loan at a higher amount than what you currently owe on your mortgage. This is used to pay off the old loan, and the difference between your old balance and what you borrow on your new loan is paid to you in cash.
And you aren't limited to using the funds just for educational purposes. In addition to paying for school, borrowers often use a cash-out refinance to pay down debt, upgrade home appliances, make home repairs, start a business, invest in real estate, and more. You are only limited by your own imagination!
It is important to note that, with a cash-out refinance, the amount you are able to borrow is reliant on the amount of equity you have in your home. You must have at least 20% home equity to be considered.
Also, since the amount you are now borrowing has increased, your monthly mortgage payment may also increase. But for many homeowners, the increase in your monthly mortgage payment could be less than the prospective debt you could be taking on otherwise.
What About Rates?
Some may try to time the market to reach their target interest rate and feel that it's wiser to wait it out before acting, but you should remember that there are certain things in life, such as schooling, that don't wait around for the perfect timing. If you are planning to take on debt regardless, it is smarter to choose the least expensive way to borrow.
A cash-out refinance is likely to give you a lower interest rate than other methods of borrowing, such as personal loans, credit cards, and even home equity loans. With the average credit card interest rate in 2023 reaching a whopping 24.52%, according to Forbes, borrowing smarter could make a cash-out refinance your financial savior.