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Cash Out

What is a cash out refinance? 

A cash out refinance is the process of refinancing your mortgage with the intent of borrowing against the equity of the home. The cash out is the portion of the money over the payoff and closing costs. Borrowers explore this option in order to take advantage of the home's equity position in order to pay for more costly expenses such as credit cards and unsecured loans, or for the purchase of high cost assets.

This sounds a lot like a Home Equity Loan... but it's not. Here are the differences:

Cash out refinance: 

Your entire mortgage is refinanced. This means that the new cash out refinance will pay off your existing mortgage and lend you the money you need on top. This means you will obtain a new interest, term, mortgage payments and thereby, a new amortization.

When do you receive your money? At the closing table, you receive a lump-sum from your lender.

Home Equity Loan and home equity lines of credit (HELOC): 

A Home Equity Loan, is a type of secured loan that acts as its own mortgage. A Home Equity Line of Credit (HELOC) is simply a line of credit secured by the property. In fact, if you have an existing mortgage on your property, the equity loan or the HELOC become second liens. A home equity loan and a HELOC will have their own terms and amortization schedules, just like a regular first mortgage would. The terms of your current first loan do not change if a Home Equity Loan is acquired. 

When do you receive your money? With a Home Equity Loan, you receive a lump-sum at the closing table. On a HELOC, you get access to the credit line usually within 2 weeks of closing. 

Which one is better? 

Depends on your goals and situation. The common denominator with both options is that the home must have equity and an appraisal is necessary. This will determine how much cash out you will be able to obtain. If you do not have favorable terms on your first mortgage to begin with, i.e., a higher rate than the current market's or are thinking of going to a different term, then a cash out refinance is the way to go. Although rates on  cash out refinances are higher than traditional ones, they are usually more favorable than rates on home equity loans or HELOCs. 

Why consider a cash out refinance? 

These are some of the most traditional reasons why you should consider a cash out refinance: 
  • Debt consolidation: The cost of borrowing against your home is cheaper than on unsecured types of loans such as credit cards and signature loans. If your payments on these have become unbearable, a cash out refinance can help you save money. 
  • Home improvement: Thinking of renovating or making additions to your home? The borrowed cash from the home's equity allows you to do so while providing for lower borrowing financing. 
  • Pay for school: You can borrow against your home's equity to pay for a child's college loans. Again, the cost of borrowing against the equity of the home can be lower than the cost obtained by acquiring private student loans. 
  • To help finance an expensive asset such as a car or a truck. 
  • To help finance a new home. If you are thinking of buying a second, vacation or investment property, you can use your existing home's equity to help finance the purchase, especially if you are aiming at meeting a 20% down payment to avoid PMI. 

For more questions about cash out refinances, contact me here.


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