Cash-Out Refinancing: Tapping into Home Equity

As a homeowner in Australia, you may have built up significant equity in your property over the years. But did you know you can tap into this equity to access cash for various financial needs? This is where cash-out refinancing comes into play. In this article, let’s explore what cash-out refinancing is, how it works, its benefits and whether it might be the right option for you.

What is Cash-Out Refinancing? How Does It Work?

Cash-out refinancing involves replacing your existing mortgage with a new, larger mortgage and taking the difference in cash. Essentially, you are borrowing against the equity you have built up in your home. Here’s a step-by-step breakdown of how it works:

1. Calculate Your Equity: Determine the current market value of your home and subtract the remaining balance on your mortgage. The difference is your home equity.
2. Apply for a New Loan: Apply for a new mortgage or refinancing loan larger than your current mortgage balance.
3. Receive the Cash: Once approved, the new loan pays off your existing mortgage, and you receive the difference in cash.

For example, if your home is worth $600,000 and you owe $300,000 on your mortgage, you have $300,000 in equity. If you refinance with a new loan of $450,000, you can take out $150,000 in cash while still owing $450,000 on your mortgage.

Cash-Out Refinancing vs Home Equity Loan: What’s the Difference?

While both options allow you to tap into your home equity, there are key differences:

Cash-out refinancing replaces your existing mortgage with a new, larger mortgage. You receive the difference in cash and continue making payments on the new loan. On the other hand, a home equity loan is a separate loan that allows you to borrow against your home equity. You receive a lump sum and make payments on this loan in addition to your existing mortgage. So, the key difference between the two is the number of loans you’ll have to repay. You’ll either have a new home loan (cash-out refinancing) or two separate home loans (existing mortgage + home equity loan).

Homeowners who have already built up substantial home equity are encouraged to choose cash-out refinancing, especially if they need bigger funding to invest in another property, renovate their home, fund their children’s college education or consolidate their debts. If you only need relatively smaller funding and can handle two repayments for a long time, you should highly consider home equity loans.

Benefits of Cash-Out Refinancing

Looking to utilise equity in your home? There are many good reasons to do cash-out refinancing. Here are some of its advantages:

• Access to Huge Funds: It provides a lump sum of cash for various purposes, such as home renovations, debt consolidation, or investment opportunities. Don’t want to renovate your property or start a business? These additional funds can also be utilised for other significant expenses, such as school fees, purchasing a new car, or taking a well-deserved holiday.
• Potentially Lower Interest Rates: If interest rates have dropped since you took out your original mortgage, you might secure a lower rate on the new loan. Speak with different lenders and compare what they can offer to get the best rate and loan features. Or better yet, let our mortgage brokers do the work for you; the best mortgage brokers can help you refinance with the lowest rate. They’ll also help you pick between fixed & variable rates when refinancing. 
• Debt Consolidation: You can use the cash to pay off high-interest debts, potentially saving money on interest payments. Home loans usually come with significantly lower interest rates than credit cards and other types of personal loans. So, if you’ve got a few different debts, it could be worth refinancing a home loan and cashing out the difference to pay off these huge debts.
• Home Improvements: Investing in home improvements can transform your property while increasing its value, further building your equity. So, if you need another reason to do cash-out refinancing, see if your home will benefit from some makeover. 

How Much Can You Borrow with a Cash-Out Refinance?

The amount you can borrow depends on several factors, including your home’s current market value, the loan-to-value ratio (LVR) allowed by the lender, and your creditworthiness. To give you an idea, most lenders in Australia let you borrow up to 80% of your property’s value when you choose to refinance and cash out. 

For example, if your property is appraised at $750,000 and you owe $300,000, an 80% LVR would allow you to borrow up to $600,000. Subtracting your existing mortgage, you could potentially access $300,000 in cash. Still, the final figures hinge on different factors, so it is best to consult a mortgage broker for a more realistic estimate. Also, a mortgage or refinancing expert can help assess and optimise your borrowing power.

Considerations for Cash-Out Refinancing

At this point, cash-out refinancing looks promising, but before proceeding with it, consider the following:

• Increased Debt: Since you’re replacing your existing mortgage with a new and larger home loan, you increase your mortgage balance. That could mean higher monthly payments and more interest over the life of the loan.
• Interest Rates: Ensure the new interest rate is more favourable than your current rate. Otherwise, that could defeat the purpose of refinancing. 
• Fees and Costs: Refinancing involves closing costs, appraisal fees, and other expenses. Ask all about these costs and evaluate whether the benefits of cash-out refinancing outweigh these costs.
• Market Conditions: Property values can fluctuate, affecting equity and borrowing capacity. So, explore your options while considering the current property market conditions and see whether it’s the right time to refinance. 

How Deltos Finance Can Help

Cash-out refinancing doesn’t come without its challenges, but the good news is that you don’t have to face them alone. At Deltos Finance, our expert mortgage brokers in Hobart are here to guide you through the process. We can help you:

• Assess your home equity and borrowing capacity.
• Find the best refinancing options tailored to your needs.
• Understand the costs and benefits of cash-out refinancing.
• Dodge the common refinancing mistakes.
• Navigate the refinancing loan application process smoothly.

Contact us to explore how cash-out refinancing can help you. With our expertise, you can make informed decisions and unlock the potential of your home equity.