Can I Access Home Equity with a Cash Out Refinance?

As a homeowner with a mortgage, you’ve likely heard about the concept of home equity and its potential benefits. But have you ever wondered if it’s possible to access home equity and use it to your advantage? 

In this article, we will explore the topic of accessing home equity through a cash out refinance. We’ll cover what equity is, how it’s calculated, the process of accessing equity through refinancing, and potential uses for these funds. We’ll also tackle rules and considerations, important factors to consider before proceeding, and the value of consulting experts in the field.

Understanding Property Equity

Equity is a fundamental concept that determines the portion of a property you possess. It’s essentially how much of your home you technically own.

To calculate your equity, start by determining the current market value of your home This is the amount you could reasonably expect to sell your home for. Next, deduct from this the remaining balance on your home loan. 

The resulting amount represents your equity. If the property market in your area has experienced growth since you purchased your home or if you’ve made additional mortgage repayments, your equity may have significantly increased.

For example, suppose you initially purchased your home for $350,000. After several years, your mortgage balance is $200,000, but the value of your property has risen to $500,000. This means you now have $300,000 in equity.

Accessing Equity through Refinancing

Now to answer the question as to whether you can access your home equity through a cash out refinance, the answer is – yes, it’s possible. By refinancing your existing mortgage, you can borrow against your equity or use it as collateral for a new loan. This allows homeowners to tap into the value they’ve built in their property without the need for a cash deposit.

When you opt for a cash-out refinance, the lender will approve a new loan that pays off your existing mortgage and provides you with additional funds based on the equity in your home. The amount you can access will depend on the lender’s criteria and the loan-to-value ratio they are willing to accept. The loan-to-value ratio (LVR) is the percentage of your property’s value that the lender is willing to lend.

Utilizing Funds from a Cash Out Refinance

When accessing equity through refinancing, you have a variety of options for utilizing the funds. Some common purposes people cite when they access home equity via refinancing include the following:

Investment

You can use the equity in your current property as a deposit when purchasing an investment property, shares, or a business. This can be a strategic way to diversify your investments and potentially increase your wealth. By leveraging the equity in your home, you can access funds to make these investments without having to save for a separate deposit.

Home Renovation

When you refinance to access equity, the funds can be used for the renovation of your existing home. By improving the property, you can increase its value and potentially enjoy a higher return on your investment. Whether it’s a kitchen upgrade, bathroom renovation, or adding a room, a renovation can enhance your living space and potentially increase the property’s market value.

New Vehicle

Instead of taking out a vehicle loan, which can come with a higher interest rate, you can use the money from an equity refinance to purchase a new car. Using your home equity gives you access to loans with lower interest rates and more favourable terms. This makes such an option a cost-effective solution for purchasing a new vehicle.

Personal Expenses

A cash-out refinance can also provide you with funds for various personal expenses. These include funds for travel or medical costs. A cashback refinance allows you to address immediate financial needs and fulfil long-held aspirations. It can be anything from a dream vacation to unexpected medical expenses and even funding your child’s education. The choice is yours when it comes to utilising your home equity to get a cash back refinance.

Rules and Considerations for Cash Out Refinancing 

When you’re thinking about refinancing your home loan to access home equity, there are specific rules and considerations to consider. The details, fees, and charges associated with refinancing will vary depending on the lender and home loan product you choose. It’s important to carefully review and compare the terms and conditions of different loan options to ensure you make an informed decision.

The lender will also evaluate the purpose of the funds when assessing your application. They may want to know how you plan to use the accessed equity and they will consider if it’s a justifiable expense. 

Note that it’s essential to communicate your intended use of the funds clearly and provide any necessary documentation. Supporting information to demonstrate that your need for the cash-out funds may help get your loan approved.

When it comes to your borrowing limits, most lenders will allow you to borrow up to 80% of your property’s current equity. Using the previous example, if you have $300,000 in equity, you could borrow up to $240,000. 

Keep in mind that specific lenders may offer higher loan-to-value ratios, allowing you to borrow up to 90% of your equity. This comes with a few caveats, of course. Also, be warned that exceeding the 80% threshold may require you to pay Lender’s Mortgage Insurance (LMI), which is an additional cost to consider.

Important Factors to Consider

Before proceeding with a cash-out refinance to access equity, it’s crucial to thoroughly assess your current financial circumstances and explore the various loan products available to you. You should consider the following factors:

Financial Situation

Evaluate your income, expenses, and overall financial stability. Ensure that accessing your equity aligns with your long-term financial goals and that you can comfortably afford the repayments associated with the new loan.

Loan Products 

Research and compare different loan products offered by various lenders. Consider factors such as interest rates, loan terms, and fees. Check out additional features to find the option that best suits your needs.

Professional Guidance 

Consulting a mortgage broker with experience in refinancing equity loans, like the brokers at Professional Lending Solutions, can provide invaluable guidance. A knowledgeable mortgage broker can help you evaluate any financial implications, recommend the ideal loan product for your situation, and address any remaining questions you may have about the pros and cons of refinancing to access equity.

What else should you know about cash-out refinancing to access home equity?

Accessing home equity through a cash-out refinance offers homeowners the opportunity to leverage their property’s value for various financial purposes. By understanding equity, calculating its value, and considering the caveats associated with refinancing, you can make informed decisions when you choose to access home equity for your financial needs. 

For more information, you can contact Phil Verheijen and his experienced team at Professional Lending Solutions. Remember, accessing equity through refinancing can be a valuable financial strategy, as long as it’s used wisely and with careful consideration.