Cash Out Refinance
Cash Out Refinancing
What is cash-out refinancing?
With cash-out refinancing, you simply refinance your existing loan or mortgage for more than what you currently owe. It is a method of refinancing a home for more than the amount owed on the original mortgage.
Example of cash-out-refinancing: Assume you owe $100,000 on a $180,000 home or mortgage, and you want a lower interest rate. You can refinance the mortgage for $125,000 or more. With cash-out refinancing, you get a better rate on the $125,000 that you owe on the house, and you get an additional check for $25,000 or more.
Cash-out refinancing VS home equity loan
- A home equity loan is a separate loan on top of your first mortgage. It is a loan in which the home owner uses the equity, if any, in his home as collateral. A cash-out refinance can be considered as a replacement of your first mortgage.
- The interest rate on a cash-out refinancing is generally lower than the interest rate on a home equity loan. Your existing mortgage is refinanced for a higher overall amount using some of the accumulated equity in your home.
- There are closing costs when you refinance your loan but not for home equity loan. Closing costs can amount to hundreds or thousands of dollars. With a home equity loan you can borrow up to 100% of the value of your home.
Applying or considering cash out refinancing?
The purpose of cash-out refinancing is not necessarily to get a lower interest rate, but rather to turn home equity into cash. You may be able to use cash-out refinancing to get lower interest mortgage rates with a larger principal, where the difference can offset paying off other debts (credit card, car loans, medical bills, etc). Instead of paying high interest rates to other creditors (such as credit card company), you pay a lower rate to your mortgage company.
Keep in mind that with cash out refinancing, your debt is tied to your home. If you accumulate more debt and alternatively you cannot make your mortgage payment, you run a risk of losing your house.
