The 411 on Cash Out Refinancing
Don't get quotes on cash out home equity finance loans before you know the basics. We'll give you everything you need to know on home equity refinancing.
Explanation of Cash-Out Loans
A cash out home equity finance loan requires you to refinance your mortgage for more than you owe, and you then take the difference in cash. For example, let's say you still owe $100,000 on a $200,000 home, and you need a lower interest rate. You also would like $40,000 in cash, perhaps to underwrite your child's first semester at a private college. With cash out refinancing, what you can do is refinance your home loan for $140,000. You should be able to get a lower rate on the mortgage loan, and you will get a check from your lender for the $40,000 difference. In this way, you've taken advantage of a very low-interest source of cash for major expenses in life.
Cash Out Refinancing vs. Home Equity Loans
Cash out home equity finance loans differ from home equity loans in several important ways:
- Home equity loans are essentially second mortgages, additional loans on top of your first mortgage
- Cash out home equity finance replaces your original mortgage
- Cash out refinancing loans usually have lower interest rates than home equity loans
- Closing costs are involved when you refinance a mortgage
- Typically, you don't have to pay closing costs when you take out a home equity loan
- Closing costs can add up to thousands of dollars in many cases
Cash out home equity finance loans don't make much sense if you already have a very low rate on your existing mortgage. Refinancing to a higher rate is not a good idea. If you can't get a lower rate with cash out refinancing, you might be better off with a home equity loan. Similarly, for homeowners who are significantly far into their mortgages, neither loans would make sense. For instance, if you are 25 years into a 30-year mortgage, your money is primarily going toward principal, not interest. Thus, it's not a good idea to refinance, even if your current interest rate is slightly higher than market rates.
Before you apply to get your home equity, make sure you do not make any big mistakes about your intentions.
