Do you own a home in Albuquerque and thinking about buying a second home? You can use the equity in your home to your advantage. One way is to purchase a second home.
One option is to use a cash-out refinance to acquire a second home, but you need to know some things first.
How do Cash-Out Refinances work?
By refinancing your mortgage, you can convert the equity in your home into cash. The difference between the new and existing mortgage is paid to you in cash.
A common reason people refinance is to obtain more favorable terms than those offered by their current loan. A refinance might lower your monthly payments or allow you to take advantage of a lower interest rate. In a cash-out refinance, your primary objective is probably to withdraw cash from the equity in your home.
When you refinance your home, you are providing collateral for a new loan. Then you get a new mortgage for a larger amount than what you currently owe.
Buying a House with a Cash-Out Refi
The value of your home currently must be significantly higher than your remaining mortgage balance in order to qualify for a cash-out refinance.
You can withdraw up to 80% of the current value of your home, minus any remaining balance. The money you receive can then be used as a down payment for your next property. Like a conventional refinance loan, you must still qualify.
In most cases, lenders will require at least a 620 credit score and a debt-to-income ratio of less than 50%. For a cash-out refi to be beneficial, you’ll need to put down anywhere between 15 and 25% of the purchase price. Most lenders will accept a lower down payment on a primary residence.
Lenders don’t have any guidelines against using the proceeds you get from a cash-out refinance to put toward the down payment of another property.
Considerations
You can choose either a variable-rate or a fixed-rate loan when you apply for a cash-out refi. Your loan payment can increase if the interest rate is variable.
A cash-out refinance may come with a higher interest rate than your original loan, meaning you’ll pay more in total during the term of the loan.
You need to decide whether the additional interest you’ll pay when you buy another home would be worth it. The debt repayment period of your current debt is also extended, so it’s not always the best choice.
There may be closing costs of up to 5% on your new refinance mortgage, taken from your cash payout. These costs cannot be rolled into the loan.
A home equity loan against your house is another option to consider. These loans have no closing costs, which is a big advantage. If your current mortgage has a lower interest rate than what you qualify for, then this may be less expensive than a cash-out refinance.
Last but not least, the biggest downside to a cash-out refinance is that your primary home becomes the collateral, even if you are using it to buy another home. If you default, your primary home can be repossessed.
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