Cash-Out Refinance
For
many, their homes are just not dwellings that protect
them against rain, sun, and wind. But they are piggy
banks, which can be used to raise some urgent money,
even if the home still lays collateral to some loan
– home loan or others. Some of the popular/available
ways to do so are home equity loans (also referred to
as second mortgages), reverse mortgages, and home equity
lines of credit. But, there is one more to this list
- cash-out refinance. In the following paragraphs, the
reader will see more on cash-out refinances and its
pros and cons.
Cash-out
refinance stands for refinancing a mortgage for a little
more than what one actually owes so that the difference
in the amounts can be pocketed by the customer himself.
For example, imagine one has taken a loan of $140,000
on his/her home, out of which the person still owes
$70,000. But he/she now wants a lower interest rate
and also some cash, say $15,000, to spend on child’s
education.
The
person can achieve these targets by cash-out refinancing
the mortgage for a bit higher amount than what he/she
owes currently. That is, if the person could cash-out
refinance the mortgage for $100,000 (say), then with
that amount, he/she could payback the existing loan,
and also will be left with some additional money, which
he/she can use for other purposes like financing his/her
child for its studies.
So,
what are the differences between cash-out refinance
and a home equity loan? Basically cash-out refinance
differs from a home equity loan in three respects. Firstly,
cash-out refinance is a replacement of the first mortgage,
while home equity loans are separate loans itself, availed
on top of the existing mortgage. Secondly, the interest
rates of cash-out refinancing are comparably lesser
than a standard home equity loan. But, here it must
be kept in mind that it could also occur the other way
around. That is, in some cases at least, the rates of
cash-out refinancing may be a tad higher than a comparable
home equity loan scheme. Finally, there are no closing
costs for cash-out refinances unlike a home equity loan.
The closing costs of a loan can be in the tune of hundreds
of dollars.
As
a sequel to the second point mentioned in the previous
paragraph, from a customer point of view, it is always
better to do some thinking before opting between cash-out
refinancing and a home equity loan. This is because,
if the interest rate of the current mortgage is lesser
than that of cash-out refinance option, then it is prudent
to go for the home equity loan itself. After all, lower
interest rate is the key factor here, and not the type
of refinancing.
Finally,
with cash-out refinancing, if the borrowed amount is
equal to or higher than 80% of the home’s value,
then he borrower may have to pay private mortgage insurance
– PMI – as well alongside the regular monthly
repayments. If that is the case, again a home equity
loan will be more beneficial than cash-out refinancing.
To
sum it up, cash-out refinance is helpful, but a lot
depends on the amount one is borrowing and how intelligently
he/she is spending the money. Hence, it is crucial that
one weighs his/her priorities sensibly. At the end of
the day, the cash-out refinancing adventure should not
end up breaking the piggy bank. Remember, you are living
in it!
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