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Cash Out Refinancing

Ask an expert: Cash-out refinancing
(Mon, 21 Aug 2006 12:24:00 EST)

Q: If I cash out some of the equity in my home when I refinance, will that raise my mortgage payment?

A: Cash-out refinancing is a popular way of freeing up cash to put toward a major purchase, such as a home renovation or new vehicle. It involves refinancing your mortgage for more than you currently owe and "cashing out" the difference. Whether that results in a higher monthly payment is up to you.

It's possible to cash out some of the equity you've built up in your home if you've been paying down your mortgage for some time and the principal has shrunk to less than it was when you first took out the mortgage. This buildup of equity enables you to request to withdraw funds when you refinance. The amount you withdraw is simply added back onto your mortgage principal.

Let's consider an example. Imagine that your home is valued at $200,000 and that you have a 7 percent fixed-rate mortgage with a 15-year term. You've been paying $1,400 a month for five years, and your principal is down to $120,000 with 10 years to go before it's paid off. That means that your equity in the home is now $80,000 ($200,000 minus the $120,000 you still owe).

Now imagine you have an opportunity to refinance at 6 percent, and you'd also like to cash out $30,000 of your equity to put in a swimming pool. That would increase your mortgage principal to $150,000 (the $120,000 you still owe plus the $30,000 you take out) and reduce your equity to $50,000.

You now have a choice about how you want to pay your loan back. If you want to continue making roughly the same monthly payment as before, it will take longer to pay off the loan, since the principal is now higher. On the other hand, if you want to stick to your original schedule, you will have to increase your monthly payments.

How does the math work out? In our example, to pay off your loan in 10 years your monthly payment would need to increase to $1,665. If you were to keep paying $1,400 a month, the new loan would take 12 years and nine months to pay off. And, because lenders don't typically offer 12-year mortgages, in reality, the closest you could get would likely be a 15-year term. This would mean your monthly payment would actually fall to $1,265.

The choice is up to you. But keep in mind that the longer you take to pay off your loan, the more interest you will have to pay. In this example, taking an extra five years to pay off the loan would cost around $28,000 extra in interest payments. As a general rule, provided you can afford it, it's therefore usually better to pay a little more each month and pay your loan off faster.

Dan Moore
Vice President, Product Management

Cash-out mortgage refinancing
(Fri, 18 Aug 2006 03:59:00 EST)

You can draw cash out of your home by refinancing your mortgage.

Your house is a potentially large source of ready money if you are willing to sacrifice some of your equity in return for liquidity. Cash-out mortgage refinancing is one way to access this cash.

What is cash-out mortgage refinancing?
Cash-out refinancing involves refinancing your mortgage for more than you currently owe and pocketing the difference. If you have been paying down your mortgage for some time, then the principal is likely to be substantially lower than what it was when you first took out your mortgage. That build-up of equity will allow you to take out a loan that covers what you currently owe -- and then some.

For example, say you owe $90,000 on a $180,000 house and want $30,000 to add a family room. You could refinance your mortgage for $120,000, and the bank will then hand over a check for the difference of $30,000.

You can take the difference and use it for home renovations, second-property purchases, tuition, debt repayment or anything else that needs a significant amount of cash. What's more, you may be able to get a more favorable interest rate for your refinanced mortgage.

However, if the interest rate offered for your refinanced mortgage is significantly higher than your current rate, this may not be a sensible choice. A home equity loan or line of credit (HELOC) might be a better idea.

Typically, homeowners are allowed to refinance up to 100 percent of their property's value. However, if you borrow more than 80 percent of your home's value, you may have to pay private mortgage insurance, or pay a higher interest rate. Again, this might make a HELOC a better choice.

Cash-out refinancing versus home equity loans
Homeowners sometimes confuse these two pools of home-financed cash. They are quite different. Cash-out refinancing is a replacement of your first mortgage; HELOCs are separate loans on top of your existing mortgage. In other words, with refinancing you get a new mortgage, not a second loan against the equity in your home.

Refinancing usually makes sense only when there has been a drop in interest rates and you want to lock in a new mortgage at a lower rate for a longer term than your existing mortgage. It can also benefit those who want to refinance their mortgages for a longer term to lower their monthly payments. In other instances where you need a short-term cash infusion, a HELOC is often a better choice.

Cash-out refinancing: When it makes sense
(Thu, 15 Jun 2006 13:21:00 EST)

Consider carefully whether to use cash-out refinancing as a tool for debt consolidation.

Cash-out refinancing is when you take out a new mortgage with a larger principal than your current mortgage. The purpose is not to necessarily get a lower interest rate on your mortgage, but to turn your home equity into cash that you can use.

Explanation
When you use cash-out refinancing, the difference in what you owe on your house and what it's worth (the equity) is paid to you as cash. The cash can then be used for almost any purpose, including debt consolidation.

Because of how cash-out refinancing works, you are only eligible for it if you have equity in your home. Home equity is the part of the home that you actually own. For example, if your home is worth $150,000, and you owe $100,000 on the mortgage, you have $50,000 equity. That $50,000 is available for you to use, depending on your lender's rules.

Debt consolidation
Suppose you have $50,000 in credit card debt and you are paying an 18 percent interest rate. You can get a much lower interest rate by using your home equity. At closing, you get that $50,000 in cash and can use it to pay off your credit card debt. Once you do that, the debt is wrapped up into your mortgage. This can be advantageous when used wisely. Instead of paying an 18 percent interest rate that is not tax deductible, you pay a much lower rate, usually around 6 percent, and get tax benefits since the debt is tied to your mortgage.

Does cash-out refinancing make sense for you?
There are situations in which it makes sense to use cash-out refinancing to consolidate debt. When trying to determine if it's a good option for you, consider the following questions.

• Can you use cash-out refinancing without raising your monthly mortgage payment? 
• Will the money that you receive from cash-out refinancing be enough to pay off your other debts?
• Are interest rates low?
• Are you able to curtail your spending so that you do not incur more debt after using the cash-out refinancing to pay off your current debt?

If you answered yes to all or even most of these questions, then cash-out refinancing may be a smart thing for you to use to pay off your debt.

Keep in mind, though, that cash-out refinancing is not always the best choice. It can be a foolish move if you do not stop overspending. If you use cash-out refinancing and then rack up more debt, you just wind up with larger debt on your mortgage plus even more credit card debt. If you choose cash-out refinancing as an option, be sure to use financial restraint. Do not forget that the debt will now be tied to your mortgage, making it possible for you to lose your home if you do not make your payments on time.

If you need to stop paying high interest rates on debt and can avoid running up more debt, cash-out refinancing is an option to consider.

 

Cash-out refinancing basics
(Tue, 30 May 2006 13:55:00 EST)

You can use cash-out refinancing to consolidate debt.

Cash-out refinancing can help you consolidate debt. It is a useful tool, but it must be used in conjunction with controlling your spending.

What is cash-out refinancing?
It is the process of taking out a new mortgage with a larger principal than your current mortgage. The difference in principal is paid to you as cash, which you can use for almost any purpose, including debt consolidation.

How does it work?
Cash-out refinancing is based on your home equity, which is the part of the home that you actually own. For example, if you have a home worth $250,000, and you owe $200,000 on the mortgage, you have $50,000 worth of equity in the home. If you refinance, that $50,000 is available for you to use (depending on your lender's rules).

What can you use the cash for?
You can use the cash in almost any way you want. One wise way to use it is to consolidate your debt. If you have high-interest credit card debt, you can usually get a much lower interest rate by using your home to secure the loan. For example, if you have $20,000 in credit card debt, you can use cash-out refinancing on your home and increase your principal by that same mount: $20,000. At closing, you get that $20,000 in cash and can use it to immediately pay off your credit card debt.

At this point, the debt is now wrapped up into your mortgage, but that can be advantageous to you. Instead of paying an exorbitant interest rate -- some credit cards are as high as 18 percent -- that is not tax deductible, you can pay a much lower rate - such as 6 percent -- and get tax benefits since the debt is tied to your mortgage.

Cash-out refinancing does not necessarily raise your monthly mortgage payment, although it certainly is possible that you could end up with higher monthly payments after refinancing in some situations. Your overall debt payment will be less, though, since you are not paying high interest to a credit card company.

What should I know first?
If you are considering cash-out refinancing, you need to be aware it only makes sense if you couple it with financial restraint. If you do not curtail your spending, cash-out refinancing can be a foolish move. If you use the money and then wind up running up more credit card debt later, you could find yourself in serious financial trouble: A larger debt on your mortgage plus even more credit card debt. Also, because the debt is now tied to your mortgage, you could lose your house if you fail to repay the debt.

Despite its risks, cash-out refinancing can still be a smart option if you need to get out from under high-interest debt, and you change your spending habits.

Cash-out Refinancing: How It Works
(Wed, 4 May 2005 14:14:00 EST)

Use it wisely and cash-out refinancing can be a great tool for consolidating debt.

Cash-out refinancing can be a great strategy to pay off debts and get you back on track financially.

Cash-out refinancing. Just what is it?
Cash-out refinancing involves taking out a new mortgage that has a larger principal than your current mortgage. The difference in principal is paid to you as cash, which you can use for almost any purpose, including debt consolidation.

This option only works when you have equity in your home. (Home equity is the part of the home that you actually own. For example, if your home is worth $250,000 and you still owe $200,000 on the mortgage, the difference is the equity available to you: $50,000 in this case. In general, that $50,000 is available for you to use, although the actual amount can depend on your lender.)

Debt consolidation
Say you have $50,000 in credit card debt and you are paying an 18 percent interest rate. You can get an interest rate at a fraction of that by using your home as collateral. With cash-out refinancing, you can increase your principal by $50,000. At closing, you get that $50,000 to use however you want. You can then pay off your credit card debts immediately. If you do that, the debt is then wrapped up into your mortgage, but that can be advantageous to you. Instead of paying an 18 percent interest rate that is not tax deductible, your new loan will have a much lower rate - probably somewhere around 6 percent -- and you are likely to get tax benefits since the debt is tied to your mortgage.

If you are considering cash-out refinancing, make sure you are aware of the potential pitfalls. Even though cash-out refinancing can be a great way to pay off debt, it can also be a foolish move if you do not curtail your spending. Cash-out refinancing does not help if you continue to run up credit card debt. If you acquire more debt, you only succeed in having a larger debt on your mortgage in addition to even more credit card debt.

Cash-out refinancing only makes sense if you couple it with financial restraint. Also keep in mind that the debt will now be tied to your mortgage, making it possible for you to lose your home if you fail to repay the debt.

Although cash-out refinancing should not be entered into lightly, it is a good option to get out of credit card debt and pay less interest if you make the move with caution.