One of the best reasons to refinance right now is to take cash out of your home. This is done by accessing the equity reserves that your home has accumulated. Equity is the difference in value between what you owe on your mortgage, and what the home’s value is in the current market. In order to do this type of refinance you usually need at least 20% equity in your property. This means that your home needs to be valued at least 20% higher than what you owe on your mortgage to be able to take any cash out.
For example, if you purchased a home for $100,000 and put down a 20% down payment, your total loan that you took out is $80,000. This means you have 20% equity in your house. If after making 1 year of mortgage payments your loan goes down to $70,000, and your home’s value remains constant, you now have 30% equity in your home and could be a candidate to refinance and cash out a portion of your equity reserves.
It’s important to note that the reason why lenders require you to have 20% equity in your home is to protect themselves in case you default on your mortgage.
By making sure there is 20% equity in your home, in the unlikely event that you default on your mortgage, the lender will still be able to sell your home and make money on it.
Why you want to cash out
Now that we’ve covered the basics on a cash out refinance, let’s talk about why this market is providing a great opportunity for home owners to access their equity reserves.
According to the Denver Metro Association of Realtors, DMAR, the Denver housing market usually sees a 5%-6% increase in home values in any given year.
However, given the low inventory of homes that we currently have on the market, this is driving home prices to unprecedented levels. This year we are seeing an 18% increase in Denver home values year-over-year. This means that home values have appreciated 3 times higher than they usually would in a given year. Because of this appreciation, many homeowners across the metro area are now sitting on 20%+ equity reserves, which is potentially making them great candidates for a cash out refinance.
Know your interest rate
The last piece in the refinance puzzle is the interest rate. Because of the Covid pandemic’s effect on our economy, the federal reserve has taken actions to try and keep it from collapsing. One of the actions they’ve taken is to drop interest rates.
By reducing interest rates they are hoping to stimulate purchasing in the economy. This is great for the homeowners out there that purchased anytime in the last couple of years, because not only are you going to be able to take cash out from your equity reserves, but you’re also more than likely going to be able to lower the interest rate on your mortgage. By lowering your interest, you are essentially lowering your monthly payment. So who wouldn’t want to lower their monthly payment while also taking a lump sum of cash out of your home?!
What could all this mean for you
Understanding why you want to refinance and the value of your home equity, the benefits of cashing out, and lowering your interest rate is your ticket to home and financial freedom and making your home value do the work for you. Now is a great time to benefit as a home owner and reap the benefits of our quickly changing housing economy, and take advantage of the lower interest rates in a hot seller’s market.
Still have more questions about whether refinancing, buying or selling your home is right for you? We have a team of mortgage experts ready to help! Contact 9x Mortgage today for a financial consultation to see if a cash out refinance would be right for you.
We look forward to serving you!