Is Cash Out Refinance Right For Me?

Homeowners nowadays like to call their homes “My little piggy banks” because that’s the way they serve their purposes. Homes can be turned into cash when the homeowners are short of money.

You are familiar with home equity loans (also known as second mortgages), home equity lines of credit and reverse mortgages. There is another loan with which you may not be familiar-- cash-out refinancing.

Cash-out refinance elaborated

With cash-out refinancing, you refinance your mortgage for more than you currently owe, then keep the difference.

For example, you still owe $100,000 on a $150,000 house, and you want a lower interest rate. You also require $30,000 cash, probably to use on your kid's 1st term at UCLA. You may refinance the mortgage for $130,000. Ideally, you get a better rate on the $130,000 that you owe on the house and you get a check for $30,000 to spend as you wish .

Cash-out refinancing is different from a home equity loan on several points:

    * A home equity loan is a separate loan from your first mortgage.
    * A cash-out refinance is a substitute of your first mortgage.
    * The interest rates on a cash-out refinancing are normally, but not always, lower than the interest rate on a home equity loan.
    * You pay closing costs when you refinance your mortgage.
    * Generally, you don't pay closing costs for a home equity loan.
    * Closing costs can be hundreds or thousands of dollars.

It doesn't make sense to refinance a higher amount at a higher rate. If your current mortgage is at a lower interest rate than you could get now by refinancing, it's probably better to get a home equity loan. Or, if you're 22 years into a 30-year mortgage, you're paying more principal than interest with each mortgage payment. If you are that far into a loan, then it doesn’t make sense to refinance, even if your current rate is moderately higher.

Is cash-out refinance right for you?
So, if you want to get a chunk of dough from your 4-bedroom home, how would you decide if a cash-out refinance is appropriate for you?

It depends on how much you would save each month and what you want to spend the money on. If you urgently need a chunk of money immediately, cash-out refinancing may be your best option.