Cash Out refi

When it comes to refinancing your home, you have two choices: rate and term refinance or cash out refinance. A rate and term refinance is a typical refinance process where your mortgage amount remains the same but your interest rate lowers or the amount of repayment time shortens. With cash out refinance, you can use your homes equity to take cash out of your home.

Things to Consider With Cash Out Refinance

Why do you need the extra money? Is it worth the risk of losing some of your home's equity?

• College tuition
• Vacation
• Home renovation or remodeling
• Family emergency
• Investment or to start a business
• Buy a second home
• Pay off other debt such as credit cards and loans with high interest rates

The total owed on your home loan will increase

When you refinance with the cash out option, it is important to remember that you are adding to the amount you already owe on your home. The cash you take out is added to the mortgage balance. This could mean the loan will take longer to pay off.

Your mortgage payment will increase

As a result of the increased mortgage balance, your mortgage payment will also increase, which may hurt your financial situation in the future.

How Does a Cash Out Refinance Work?

Let's say that your homes current value is $600,000 and you owe $300,000. The difference between what is owed on your home and what it is actually worth is your home's equity. For this example, we now know that you have $300,000 of equity in your home.

Now suppose you decide to take out a second mortgage (which is not a cash out refinance). In the above scenario, you open a home equity line of credit (HELOC), which gives you credit in the amount of $200,000. The HELOC is added to the original balance owed on your home of $300,000. You would now owe $500,000 and the equity in your home would decrease to $100,000. Your payment and the term of your first mortgage stay the same.

Now let's pretend you decide to go with a cash out refinance loan and request $200,000. Your original $300,000 mortgage is rewritten to include the $200,000 cash out. The cash out amount is added to the original mortgage making it $500,000.00, thereby changing the payment and the term of the loan. You will also likely have a new lender. The $200,000 is handed to you in the form of cash, giving you the option to use it any way you like.

What You Need to Know About Cash Out Refinance

12 months: In order to be eligible for cash out refinance, the majority of lenders will want proof that you have been in your home for at least 12 months. If you are an investor looking to remove cash out of a home you just purchased, you may have trouble finding a lender willing to work with you unless you can show that you have 25% of the mortgage in equity.

Cash Out without the cash : Even if you are using the money to pay off credit card bills, bank loans, and other financial institutions, it is still considered a cash out refinance.

Exercise caution: You should only refinance your home if you feel this is the best option for you. Remember that the money you receive will need to be paid back and could potentially become a financial burdon later in life.

Is Cash Out Refinance a Good Choice?

Making the decision to take cash out of your home should be heavily evaluated as there are pros and cons to this type of refinance. It depends on how much time you have left on your original mortgage. If you are close to paying off your home, you may want to consider just waiting until the home is paid off so you don't have to refinance the original loan.