When to Consider Cash-out Refinancing?

Cash out refinancing means when a loan is taken out on property that is already owned by the person. This is basically a mortgage refinance on your own home loan.

Difference between Cash out Refinancing and Home Equity Loans:

  1. A home equity loan is a separate loan on top of your first mortgage.
  2. While a cash out refinancing is an alternate of your first mortgage.
  3. The interest rate is low in cash-out refinancing as compared to home equity loan.
  4. You have to pay a closing cost in cash out refinancing.

Example:

For instance, you owe $80,000 on a $150,000 house, and want a lower interest rate. You may want $20,000 cash, maybe to spend on some activity. You can refinance the mortgage for $100,000. Ideally, you get a better rate on the $80,000 that you owe on the house and you get a check for $20,000 to spend as you wish.

Cash-out Refinancing Suitable For You:

This depends on the amount of savings and expenses you do. When you decide to do the cash-out refinancing option, you need to remember that if you end up borrowing more than 80% of your home’s value, you need to pay for the private mortgage insurance. If you need to pay PMI, then go for the home equity loan.

Example:

  • Jack and Jill took out a $100,000, 30-year fixed rate mortgage on a $130,000 house in mid-1999.
  • The interest rate is 7.24% making their monthly payment of $681.50.
  • For 8 years, they did not go for refinancing.
  • They qualify for a rate of 6.27 percent in spring 2007.
  • They owe $90,000 and they need $20,000 for Jack’s surgery.
  • They can refinance $110,000 at a cost of $678.72 per month for 30 years.
  • They would pay a total of $244,340 in principal and interest for over 30 years.
  • They can even refinance the $90,000 at a cost of $555.32 a month and then take out a $20,000 home equity loan at 7.94 percent for 20 years.
  • That will cost $166.54 a month.
  • Now, they will have to pay $721.86 per month for 20 years, then $555.32 per month for the last 10 years.
  • Total cost over 30 years: $240,884.
  • With the last option, they will have to face problem with higher payments for 20 years, but will save about $3,456 over 30 years.

Spend Wisely:

Take a close look on how to spend the cash out refinancing method. Make a spreadsheet and then decide what you want to do.

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