Cash-out refinancing made simple
With every mortgage payment, you've invested more in your home's equity. As a
potential source of funds, some of that equity can be exchanged for cash,
either through a home equity loan, or during what is commonly known as cash-out
refinancing.
How a cash-out refi works:
Cash-out refinancing involves refinancing your mortgage for an amount larger
than what you currently owe, and pocketing the difference. If you have been
paying down your mortgage for some time, then the principal is likely to be
substantially lower than what it was when you first took out your mortgage.
That build-up of equity will allow you to take out a home loan that covers what
you currently owe -- and then some. For example, say you owe $90,000 on a
$180,000 house and want $30,000 to add a family room. You could refinance your
mortgage for $120,000, and the bank will then hand over a check for the
difference of $30,000.
Ready cash for any purpose
As a means to access substantial funding, it's hard to beat cash-out
refinancing. The money is distributed in a lump sum and can be used for just
about anything. Homeowners frequently use a cash-out refi to pay for major
expenditures such as:
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Home renovations like a new kitchen or bath
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Debt consolidation
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College tuition
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Purchase of a new vehicle
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Emergency expenses
What's more, you may be able to get a more favorable interest rate for your
refinanced mortgage.
However, if the interest rate offered for your refinanced mortgage is higher
than your current rate this probably isn't a sensible choice. A
home equity loan or line of credit (HELOC) might be a better
idea. Also, if you borrow more than 80% of your home's value, you may have
to pay private mortgage insurance
or pay a higher interest rate. Again, this might make a HELOC a better choice.
Cash-out refinancing versus home equity loans
Homeowners sometimes confuse these two pools of home-financed cash.
They are quite different. Cash-out refinancing replaces your old loan with a
new one; HELOCs are separate loans carried on top of your existing mortgage. In
other words, with refinancing you get a new mortgage, not a second loan against
the equity in your home.
Refinancing usually makes sense only when there has been a drop in interest
rates and you want to lock in a new mortgage at a lower rate for a longer term
than your existing mortgage. It can also benefit those who want to refinance
their mortgages for a longer term to lower their monthly payments. In other
instances where you need a short-term cash infusion, a HELOC is often a better
choice.
Need lower monthly payments?
Extra cash? A fixed
mortgage rate?
Refinance now!
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