Cash Out
With cash-out refinancing, you can refinance your mortgage
for more than you currently owe, then pocket the difference.
The article below explains this program pretty well,
but obviously, we'd love the chance to talk to you and
help determine what's best for your specific
situation.
Understanding
cash-out refinancing
By Holden Lewis • Bankrate.com
Remember the Mother Goose rhyme about the old woman
who lived in a shoe? That is so 18th century. Today
she would live in a piggy bank, and so would her neighbors.
Homeowners today treat their houses like piggy banks,
readily transforming their equity into cash and credit.
You have home equity loans (still sometimes called second
mortgages), home equity lines of credit and reverse
mortgages. Then there's cash-out refinancing.
Cash-out refinancing explained
With cash-out refinancing, you refinance your mortgage
for more than you currently owe, then pocket the difference.
Here's an example: Let's say you still owe $80,000
on a $150,000 house, and you want a lower interest rate.
You also want $20,000 cash, maybe to spend on your kid's
first semester at Princeton. You can refinance the mortgage
for $100,000. That way, you get a better rate on the
$80,000 that you owe on the house, and you get a check
for $20,000 to spend as you wish.
Cash-out refinancing differs from a home equity loan
in a couple of ways. First, a home equity loan is a
separate loan on top of your first mortgage; a cash-out
refi is a replacement of your first mortgage. Second,
the interest rate on a cash-out refinancing is usually,
but not always, lower than the interest rate on a home
equity loan.
Another difference: You have to pay closing costs when
you refinance your loan; you don't have to pay closing
costs for a home equity loan. Closing costs can amount
to hundreds or thousands of dollars.
Finally, 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.
Is cash-out refinancing right for me?
So, if you want to extract a chunk o' change from your
three-bedroom piggy bank, how do you decide whether
a cash-out refi is right for you?
It depends on how much you would save each month and
what you want to spend the money on.
Let's take the example of the mythical Jack and Jill
Bankrate. They took out a $100,000 mortgage on a $130,000
house in early 1992. Their interest rate was 9.95 percent,
making their monthly payment $873.88 (plus taxes, insurance
and other extras).
For 13 years, Jack and Jill have been so busy fetching
pails of water that they never bothered refinancing.
Now it's spring 2005, and they qualify for a rate of
6.02 percent. They still owe $87,000 on their mortgage
and they want to grab $20,000 cash to pay for Jack's
cranial surgery. They could refinance $107,000 at a
cost of $642.90 a month for 30 years, allowing them
to pocket the $20,000. Over 30 years they would pay
$231,442.40.
Or they could refinance the $87,000 at a cost of $522.73
a month, then take out a $20,000 home equity loan at
7.36 percent for 20 years. That would cost $159.41 a
month. Added together, they would pay $682.14 a month
for 20 years, then $522.73 a month for the last 10 years.
Total cost over 30 years: $226,440.75.
With the latter option, they might struggle with higher
payments for 20 years, but will save about $5,001.65
over 30 years. Which option they take is a matter of
personal preference.
When you decide whether to do the cash-out refinancing
option, keep in mind that you'll have to pay private
mortgage insurance if you end up borrowing more than
80 percent of your home's value. If you would have to
pay PMI, it might be cheaper to take out a home equity
loan.
Spend wisely, dear friends
Even before you do the math, it's best to take a close
look at how you plan to spend the money from cash-out
refinancing. Specifically, is the cash for a short-term
purpose or a long-term purpose?
If you're going to make payments for 15 or 30 years,
it makes sense to spend the money on something enduring:
an addition to the house that will increase its value,
potentially lifesaving experimental medical treatment
that your health insurance won't pay for, or to start
a business.
If you want to spend the money on a vacation, your
daughter's wedding, a car or a boat, think long and
hard. Do you want to make payments on the object of
your desire for the length of the mortgage?
In other words, do you want to spend 15 years paying
for your monthlong dream vacation? Do you want to spend
30 years paying for that Porsche? The car might be on
the junk heap by the time it's paid for.
Maybe you want the cash so you can bulldoze a mountain
of high-interest credit card debt. Yes, you're paying
a lower interest rate and you can take a tax deduction,
but you're probably lengthening the time it would take
to pay off the credit card debt.
In essence, you're taking 30 years to pay off credit
card debt that you might have been able to tackle in
five or 10 years by cutting other expenses or taking
out a shorter-term home equity loan.
Don't break the piggy bank -- you're living in it.
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