Cash Out Refinancing



Cash Out Refinancing

Cash out refinancing is an alternative to taking out a second mortgage home equity loan. A cash out refinanancing is like buying your house from yourself for a higher price than your current mortgage balance. The money from this transaction is used to pay off the original mortgage, and the difference is given to you.

This type of home equity loan is not suitable for everyone. Saving money is the purpose of the cash out refinance. An up front closing cost is required before the loan is given so you should be able to recoup this amount in an exceptable time frame.

Cash out refinancing is not a good option for you if you do not lower your monthly payments. People with interest rates that are equal or lower than the current standard rates should not use this method. Refinancing into a loan with a higher interest rate causes monthly payments to be higher, and you will lose money in the long run.

If a pre-payment penalty clause exists in the mortgage contract you should not consider a cash out refinance as an option. When a home is refinanced, the existing mortgage will be paid in full. A pre-payment penalty clause will require that you pay an additional fee of a certain percentage to your current mortgage lender.
(click to learn more about pre-payment penalty provision)

It is not a good idea to refinance for the full amount of your home's appraised value. You should always have a cushion in the event that you need to sell your home. Though it is unlikely that a home's appraised value will decrease, it is possible. Therefore, a good rule of thumb is to not refinance for more than 8 percent of the home's appraised value.

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