What are the Benefits of a Cash Out Refinance?
With a home equity loan, your monthly mortgage payment gets split up for principal, interest and, depending on your loan structure, taxes and insurance. The amount that goes toward the principal balance, coupled with the rise in home values in your area, increases the equity in your home. You can take a home equity loan out on that amount, providing you maintain proper loan-to-value limits. The advantage is you can access cash for a variety of purposes without changing the terms of your first mortgage. That’s great if you like your loan. However, if you are in a position where you can improve the terms of your first mortgage, you might want to opt for a cash out refinance.
Cash out refinancing
Cash out refinancing entails replacing your current mortgage with a new one that includes the original loan balance plus the amount of cash you’d like to ‘take out’ along with any costs, if applicable. Basically, that means you can refinance the existing loan, once any liens are paid off, for more than the current mortgage and take home the rest in cash.
Here’s a ‘for instance:’
You’ve been steadily paying a monthly mortgage on your $300,000 house and home values have risen so your house is now worth $375,000. Because you’ve paid down $25,000 of principal and the house has increased $75,000 in value, you have equity of $100,000. Your daughter has announced that she’s been accepted to an Ivy League school, and you know the college fund you started when she was a baby just won’t cut it now. Instead of taking out a college funding loan, you can look at a cash out refinance of your current mortgage. Taking, for example, the $100,000 in cash equity, would take a bite out of daughter’s tuition bill. Doing a cash out refinance means you would get a completely new mortgage of, again, $300,000, but that other $100,000 (less any fees and closing costs) would go to you.
What makes the most sense?
That’s up to you to decide.
There are essentially two types of refinance loans: rate/term and cash out. The rate/term gets you a better rate or terms on your loan, but you cannot pull money out. A cash out refi gives you a new mortgage for a higher amount, and you take the difference home in cash. This is useful to pay off high-interest credit cards, old debt or perhaps even student loans, depending on their rates.
A standard home equity loan is also known as a ‘second mortgage.’ You can get an affordable rate, but it will most likely be higher than that of your first mortgage and you will be making payments on two loans each month. Even if you are very happy with the terms of your current first mortgage, once you add the two payments together, a cash out refinance might be a strong option in the short or long term.
Things to know
- Refinancing a regular mortgage means you will pay closing costs, although they can often be rolled into the loan.
- Cash out refinancing replaces your first mortgage with a new first mortgage, which will carry different terms.
- Home equity loans are second mortgages that must be paid concurrently or consecutively with the first one; check with your lender – this can be the best option if you have an excellent rate on your first and you don’t want to lose that in a refinance.
- Creating an option-assessment list with Leo Namiot a licensed lending officer is recommended so you can get all the information as basic dollar amounts and see how it will fit into your budget.
Learn more about locking in your financial future from Leo Namiot @www.LeoLends.com.
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