Real Estate Blog - How much does cashing out your equity really cost you?

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How much does cashing out your equity really cost you?

Be mindful when pulling cash out of your home that the cost of doing this is not excessive. Paying $7000 in refinancing fees may not be worth it when pulling out $15,000. You may want to try an alternative option to tide you over until your circumstances change.

When trying to cash out the equity in your property there are two choices. First is adding a second mortgage or home equity loan. The second option is to refinance your primary mortgage and extend the balance. Besides considering the cost of both these options you will also want to consider which option will give you the best over all monthly payment.

Doing a cash out refinance is a very common thing. Many homeowners take cash out of the equity in their homes to send their children to college, take vacations, invest in other areas, consolidate debt, pay for medical bills, regain control of their finances, and for many other reasons as well. If you need only a small amount of money to help your situation out then you might be best off trying to get a home equity line of credit because most of the time you can obtain a home equity line of credit for little to no cost at all. However, if you are looking to cash out a substantial amount of money it will probably be best for you to communicate with your loan officer or mortgage professional exactly what you want and need and have them show you the differences in costs and payments between an equity line or a second mortgage and a first mortgage refinance.

Many times a cash-out loan makes sense, particularly if you plan on staying in your home a long period of time. Ask your mortgage professional about low cost refinance options as well as a loan with a piggyback line of credit for unexpected future expenses.

Many people choose to use the cash taken out of their equity for home improvement projects that will enhance the value of their home and protect appreciation. Additional rooms, garages, decks, pools, and guest houses are popular choices for the home owner who wants to use equity for home improvement.

David Mordue / Mortgage Planner / Liberty Financial Group - Kirkland / - http://www.dreamhomewa.com/

Posted by David Mordue - Mortgage Planning & Investing on 08/13/2007 04:01 PM

Comments (4)

mortgage, refinance

4 Comments on How much does cashing out your equity really cost you?

AUG

2007

You have raised some great points here. A full cash out may not the be answer for everyone. It is helpful to explore other options depending on the circumstances.

I once did a cash out refinance of a guys house so that he could buy a pick up truck. When I pointed out to him that he was in essence financing that truck for 30 years all he said was, "Yeah, but that almost makes the truck free!" Which when you considered the monthly savings that he was getting by lowering his rate, did make it seem like a good deal. I personally never would have done that!

Who was I to argue with him?

Bob Mitchell

ValueList Real Estate Services, Inc.

I support leveraging Dollars completely but there is one caveat that no-one mentions. House price deflation could create a negative-equity situation. When the Stock Market falls there is no problem if you do not have to sell but IF you do the money to pay off the debt has to come from somewhere.

My definition of negative equity is .... not having enough equity in your house to sell it if you need to be able to get out of it.

By this definition, anyone cashing out past 90% of their home's value is in a negative equity situation (assuming it costs 10% to list and sell the house and pay the closing costs and excise taxes)

After this past few weeks, my take is that anyone taking out a 2nd mortgage to 95% had better be very well qualified for their first mortgage if it needs to be refinanced it the next 24 months. Slowing home values and tighter guidelines will make it tougher to get 2nd liens re-subordinated.

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