How to pay back your HEI: cash-out refinance

Cash-out refinances are a strong option for homeowners looking to pay back their HEI and change the terms of their current mortgage. Explore the pros and cons to determine if a cash-out refinance is best for you.

Lindsay VanSomeren
August 16, 2023

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One of the primary benefits of an HEI from Point is its flexibility. You won’t need to make any ongoing payments during your term in exchange for funds that you can use right now, for whatever you want. If you’re ready, you can pay it off early at any time without penalty. 

Many homeowners choose to pay back their HEI early using home equity financing. There are a few different ways to do this, such as by using a HELOC or a home equity loan. One option, in particular, stands out: roughly 64% of Point homeowners have paid back their HEI using a cash-out refinance. We’ll help you figure out if this is a good option for your situation, too. 

Cash-out refinance: an overview

Refinancing is a simple concept in the finance world: you simply replace one loan with another. You might do this for a few different reasons, such as to get a lower interest rate, a smaller payment amount, and/or to borrow against the equity you’ve built up in your home. 

If you borrow against your home equity, you’ll essentially be taking out a larger mortgage than you currently owe. Your lender would then, in turn, offer you the difference in cash, which you can use however you like. Homeowners commonly use that cash to pay for home repairs or pay back the money they’ve borrowed elsewhere — including for an HEI.  

Taking out a cash-out refinance isn’t the same as a simple rate-and-term refinance, where you may qualify for a lower interest rate or a longer term length on your current balance. Since a cash-out refinance requires taking out a larger loan, many lenders have stricter qualification requirements and charge higher interest rates. Even so, a cash-out refinance can often still work in your favor. 

It’s also important to note that you’ll need to pay back your Point HEI if you take out any cash-out refinance loan. You don’t need to pay back your HEI if you’re only doing a simpler, more traditional refinance where you’re only swapping out your rate or term length, without borrowing extra. For rate-and-term refinances you’ll need to get ahold of Point’s customer care team, who can help you send a subordination request to your new lender so that your liens remain intact.

Pros and cons of using a cash-out refinance to pay back your HEI

Pros

  • Helps build credit: If you make all of your payments on time, your mortgage can help you grow a better credit score
  • Simplifies your bills: You’ll only have one loan payment to make each month with a cash-out refinance instead of two separate payments if you take out another loan.
  • Lump sum of money: You can pay back your HEI in one fell swoop. 
  • Potential for a lower rate: Swapping your current mortgage for a lower-interest version can help you save money over the long run and help you repay your debt faster.
  • Tax-deductible loan interest: You may be able to claim a deduction for any mortgage interest you pay. Check with your tax advisor to see if you’re eligible. 
  • Potential for a longer term length: Opting for a longer-term loan can shrink your monthly payments, although you’ll be in debt for a longer period of time and may pay more total interest over the long run.

Cons  

  • Increased debt: A cash-out refinance means taking out more debt, which makes it harder to qualify for more financing and can make it tougher to pay your bills. 
  • Foreclosure possibility: If you have trouble paying back your mortgage, your lender can foreclose on your home to satisfy your loan agreement. 
  • Expensive closing costs: You’ll pay a new set of closing costs totaling between 2% to 5% of your loan amount, just as when you took out your first mortgage. 
  • Monthly payments required: It can be jarring to start making payments again, especially if you’ve gotten used to your HEI which doesn’t require any until your term ends. 
  • Interest rates may be higher: Lenders often charge higher rates for cash-out refinances since they deem them a bit riskier than first mortgages. That can also bump up the total amount of interest you have to pay before the loan is paid off.
  • Credit and income qualifications: Lenders generally look for a high credit score and income before approving you for a loan. You may be able to qualify with less, but your costs may increase as well. 

Is a cash-out refinance the best way to pay back your HEI?

Here are a few questions to ask yourself that might help you decide whether a cash-out refinance is the best way to pay back your HEI:

Do you want to keep your home?

You can pay back your HEI in a few different ways, most of which allow you to keep your home. If you’re ready to part ways, however, a better option may be to sell your home and use the proceeds to pay back your HEI. 

Can you make monthly payments?

Not having to make monthly payments is a huge benefit of Point’s HEI, but that won’t be the case with a cash-out refinance loan. You’ll need to ensure that you’re well-positioned to make regular monthly payments without stressing your budget. 

Can you qualify for a better mortgage?

Many people choose Point in the first place because it’s more accepting of different credit profiles. You may find that your credit score has increased since you first took out your HEI, however, allowing you to qualify for a better rate on financing. 

Do you want a lower rate, a fixed rate, or a longer term length on your current mortgage?

The major benefit of a cash-out refinance versus a home equity loan or HELOC is that you can replace your whole mortgage with something that’s more suited to your goals. If you’re hoping to pay off your house sooner and save money, replacing your current mortgage with a lower-rate option (if you qualify) can help you achieve this goal. If you have an adjustable rate mortgage and would prefer the stability of a fixed rate, a refinance can make that possible. 

Additionally, if you’re hoping to lower your monthly payments, doing a cash-out refinance for a longer term length than you have left on your current loan allows you to stretch those payments out over a longer period of time, making each individual payment smaller. Be aware, however, that this can increase the total amount of interest you have to pay over your term length. 

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How to pay back your HEI with a cash-out refinance

Once you’ve been preapproved by a lender, paying your HEI back is a snap. Here’s a good strategy to make sure you get the best refinance loan possible, along with how to navigate paying back Point:

Step 1: Determine your eligibility and readiness for a cash-out refinance

You’ll need good credit and a stable, solid income in order to qualify for a cash-out refinance with most lenders. Many homeowners find their credit score has improved since they first took out their HEI, which you can check by looking up your credit report and your credit score. Your credit score can also tell you what sort of rates you can expect to pay on a loan, and how much your monthly payments might be. 

It’s also a good idea to check your budget. You can use a loan calculator to estimate your monthly payments and make sure you’ll be able to easily make the payments each month. It’s a good idea to leave some flex room in your budget for emergencies and new expenses. 

Finally, check to see how much equity you have in your home. Most lenders require that you have at least 20% equity in your home before they’ll consider you for a cash-out refinance. 

Step 2: Weigh your options

Now that you know your financial situation, you can make an informed decision about your best option. Spend some time talking with your loved ones about your long-term home plans, and consider whether now’s a good time to refinance given the current environment for interest rates and home values. 

The more your home’s value has increased, the more you’ll have to pay Point back. Since home values generally increase over the long run, you may only have to pay back a smaller amount if you do so earlier in your term. If you’re in a high-interest-rate environment, however, it may be tough to find a lower rate on a new mortgage than what you’re already paying. 

Consider your other options to pay back your HEI too. Home equity loans and HELOCs also allow you to tap into your home equity to pay off your HEI, for example, and may allow you to keep a lower-rate mortgage in place. Other options to pay back your HEI early include:

Step 3: Apply for a cash-out refinance

If a cash-out refinance makes the most sense to you, your next step is to shop for rates with different lenders, such as mortgage companies, brokers, banks, and credit unions. The more lenders you check with, the better your odds of finding the best option since each lender prices things differently. 

Here are a few good lenders and resources to consider:

When you find a lender you like, go ahead and fill out a full cash-out refinance loan application. It helps to have copies of documents on hand to show proof of your income, assets, and your identity, but make sure to keep in touch with your lender in case they require other details. 

Step 4: Get a payoff estimate from Point

You can reach out to Point when you start going through the closing process for your new cash-out refinance loan. Although Point will email you a new statement each quarter listing your payoff amount, you’ll need a new, up-to-date estimate, which Point can help prepare for you. 

Point will use an automated valuation method to estimate your home’s current value, which the team will use to generate your final payoff amount. You’ll be notified of your home’s value, and if you’d like to challenge the estimate, you can request a reconsideration from Point. Point may order a more comprehensive appraisal costing anywhere from $125 to $600 in this case. 

Step 5: Close on your cash-out refinance and pay off your HEI

Your new lender will send part of your loan proceeds to Point directly to repay your HEI, but you’ll need to connect the two teams. 

Let Point know your new lender’s name and contact information when you reach out for a payoff estimate so they can send a payoff statement to your new lender. That way your new lender can coordinate where to send the funds. After that, your agreement with Point will be complete, and you can transition to paying off your new loan. Remember to always sign up for autopay on any new loans so that you don’t miss any payments. 

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Final thoughts

A cash-out refinance is a popular way many homeowners pay Point back. It’s an especially good option if you’re looking to change up the terms of your current mortgage. If you’re having trouble sorting out your options or you just want unbiased advice from a financial professional, a fiduciary advisor that works on a fee-only basis can help guide you. 

Regardless of which option you choose, Point’s customer care team is ready to help you pay back your HEI when you’re ready. You can get more information or kick off the process by reaching out via email (servicing@point.com) or phone (650-632-5040) at any time.

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