How to Refinance to Purchase a House

March 3, 2017

How to Refinance to Purchase a House

One of the great financial benefits of getting a sizable chunk of your home loan paid off is that you can then refinance to fund other purchases. You can use your built-up equity to take out a loan for more than what you owe on your home, and then use this money to make another major purchase to improve your life, such as paying down high-interest debt, buying a new car, or investing in property.

This is an option that gives you more financial freedom. You may want to consider taking advantage of it after all, you’ve earned it!

How Refinancing to Make a Purchase Works

If you’ve been paying down your mortgage for years or if you put down a large down payment when you bought your home, then you probably have a reasonable amount of equity. The value of your home increasing simply because the market shifts while you own your home, can also boost your equity.

For example, if your home is valued at $350,000 and the remaining balance on your mortgage is $150,000 then you have $200,000 of equity. Lenders won’t allow you to refinance all of your equity, but you can use a percentage of it.

Maybe you’re planning on renovating your kitchen or you need to take out a loan to help pay for your child’s education expenses. You can save money by financing with a cash-out refinance. Why? Because this is the option that will probably give you the best rate.

This is how it works:

  • You refinance your mortgage for more than what you currently owe. In the example above you owe $150,000. If you need a $30,000 loan, you could refinance for $180,000.
  • You can then use that $30,000 to pay for other expenses aside from your mortgage.
  • As long as you are able to refinance at a lower rate, you’ll likely reduce the cost of financing your needs as mortgage rates tend to be significantly lower than the interest charged on other types of loans, such as credit cards and personal loans.
  • When you refinance your mortgage, you’ll also get a lower rate than you would have if you simply took out a home equity line of credit because you are reducing your rate when you refinance.

What Can the Money Be Used For?

You can use the money to make a purchase or to improve your financial situation. You may want to:

  • Buy a new car, but finance your purchase with your lower mortgage rate
  • Fund a vacation that you’ve been dreaming of
  • Help start your own small business
  • Pay for your child’s education costs
  • Invest in a second property
  • Pay off other loans, such as credit card debt and personal loans, thus consolidating your debt at a lower rate
  • Renovate your home, which will also increase the value of your home and increase your equity

When refinancing to help fund your lifestyle, keep in mind that you will have to pay fees to cover the costs of refinancing. That’s why it is important to shop around when choosing which lender to refinance with. You want to make sure you get the best rate and don’t end up overpaying in fees.

You should also talk to your current lender to see what kind of deal they can offer you to refinance. With plenty of equity in your home and good credit, lenders will likely be very interested in working with you.

Also, keep in mind that when you refinance and cash-out more money in order to make a purchase, you are increasing your overall debt. You’ll end up with larger monthly repayments so make sure you are in a comfortable position financially to be able to pay off your debt.

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