Cash-Out Mortgage Refinancing: What Is It? When Should You Do It?

Equity versus liquidty.

In its simplest terms, this is what cash-out mortgage refinancing is all about. Because your home is a potentially large source of money, you need to consider the pros/cons of taking some of that cash out now, as opposed to letting it continue to build.

What is cash-out mortgage refinancing?
Cash-out refinancing involves refinancing your home loan for more than you currently owe. You subsequently pocket the difference. The longer you’ve been making mortgage payments, the lower your principal will be; it’s likely to be substantially lower than what it was when you first moved in.

Such a build-up of equity will allow you to take out a loan that covers what you currently owe … and then some.

For example: You owe $90,000 on a $180,000 house and need $30,000 to add a family room. You could look into a mortgage refinance for $120,000. The bank will then hand over a check for the difference of $30,000.

You can use this cash for anything you want, from home renovations to second-property purchases to college tuition payments. Also, 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 this value, you may have to pay private mortgage insurance, or at least a higher interest rate.

Cash-out refinancing versus home equity loans
Owners sometimes confuse these two options for home-financed cash. But you won’t anymore, will you?

Cash-out refinancing is a replacement of your first mortgage; home equity loans are separate loans on top of your existing mortgage. In other words, with refinancing you receive new mortgage, not a second loan against the equity in your home.

Refinancing typically makes sense only when there has been a drop in interest rates and you want to lock in a new mortgage at this lower rate for a longer term than your existing mortgage. In other instances where you need a short-term cash infusion, a HELOC is often a better choice.

Speak with experts and home mortgage brokers today to learn more. They’ll guide you through the important steps of whatever path you choose.