Cashout Refinance

When the amount you owe on a mortgage is less than the home’s value, you may qualify to get a cash-out mortgage. This is a type of loan that converts your equity into cash by refinancing an existing mortgage for more than the balance due. For example, say that you own a home worth $100,000, and still owe $75,000 on it. You get a new mortgage for the entire $100,000, and get to pocket the $25,000 difference. It can be very convenient for solving a vexing cash problem, or financing a major purchase; however, as with all types of mortgages, proceed with caution. A cash-out loan may solve an immediate problem, but as your payments will be larger, it may create additional ones in the future.

When considering a cash-out loan, compare the relative advantages of this loan compared to a home equity loan. The two are similar, but they may carry different interest rates and terms, and depending on your situation, you may do better taking a home equity loan rather than a cash-out loan.

A cash-out refinance does differ slightly from a home equity loan. A home equity loan is a separate, or second mortgage, and taking one out will leave you with two payments. A cash-out loan just replaces your original mortgage, so you still have one payment, although it will be larger. And because the cash-out loan is a first mortgage while a home equity loan is usually a second mortgage, the cash-out loan usually carries a lower interest rate.

However, there are closing costs for a cash-out refinance; and no closing costs for a home equity loan. Which one is better will depend on all the variables; just crunch the numbers and see which one produces the better bottom line opportunity.