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Is Cash-Out Mortgage Refinancing a Good Idea?

At present, mortgage borrowers have much greater flexibility than they used to have in the past. This is because there are numerous different refinancing programs available. One of them is the cash-out loan. It is available from virtually all lenders. Find out what it is and whether it will be the right option for you.

How It Works

With cash-out mortgage refinancing, you take out more money than the balance on your existing home loan. The difference between the principal of the new loan and the balance on the old one is given to you directly and you can use it in any way you like. Basically, you take cash out when you refinance.

The amount of cash that you can take out depends on the equity that you own in your property. The more house you actually own the more money you can take out. Still, limits apply in most cases. You will most probably not be able to borrow a sum corresponding to the total home equity that you have.

Qualifying and Costs

There are strict requirements for cash-out mortgage refinancing that you have to meet. Most lenders require you to have owned the property for at least a year or two. They will also take into account your loan-to-value ratio. In most cases, it has to be lower than 85% in order for you to qualify. You should have sufficiently high credit score. Typically, it has to be higher than the score require for traditional refinancing.

When you take out the new loan, you will have to pay the closing costs which are typically around 3% of the loan amount. You should also keep in mind that you will have to pay interest on both the amount for repaying your previous loan and on the cash amount that you take out. If the term of the new loan is long, the cost of borrowing the extra cash can be considerable.

Benefits and Risks

The main benefit of cash-out mortgage refinancing is that you will be able to borrow a considerable amount of money at a fairly low interest rate. The interest is lower than that on consumer loans simply because the home loan is backed with your house. The fact that you can borrow money for less gives you the opportunity to repay higher-interest debt such as debt on credit cards. You can also make improvements to your property to boost its value. You can invest the money in your children’s education.

The main risk of borrowing cash against your property is easy to evaluate. If you do not repay what you owe, you may lose your home. It is up to you to decide whether it is worth assuming this risk. You need to take into account your income and its size and stability, your savings and your plans for the future in order to make the right choice.

Finally, you should keep in mind that cash-out mortgage refinancing is not the only way in which you can cash out on your home equity. You can take out a home equity loan or a home equity line of credit. You should certainly consider these alternatives as well.

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