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Cash Out Home Equity to Pay for Large Purchases

Though in recent years it's been relatively easy for people to use their homes as an ATM machine, today's real estate environment has made it tougher for homeowners to cash out home equity. Whether you're looking for money to renovate your home, pay your kid's college tuition, or start a business, here's what you need to know to cash out your home equity.

You May Have to Refinance

House values have fallen in many places, so it's important to determine exactly how much equity you have in your home. If you have less than 20%, you may have to do a refinance home equity cash out. That means you will replace your existing mortgage with a new loan. A refinance home equity cash out may make sense if you can get a lower interest rate and lower monthly payments. But keep in mind that you'll pay closing costs to refinance your mortgage, which could tack thousands of dollars onto the deal. Also, if you borrow more than 80% of the value of your home, you'll probably end up paying for private mortgage insurance (PMI).

Equity Loans May Work Better

If you find that you'll have to pay PMI, you may be better off getting a cash out home equity loan. You won't have to pay closing costs, but equity loans generally have higher interest rates than refinancing so make sure you shop around for the best deal. It may make sense to get a cash out home equity loan if you don't have too many years left to pay on your mortgage.

A home equity loan gives you a fixed rate of interest so you know exactly what the monthly payments will be. If you choose to get a home equity line of credit, you'll have a variable interest rate so your monthly payments could increase at any time. Two advantages of getting a home equity line of credit are that you don't have to use the money until you're ready, and you can pay it down and then borrow money again later.

Should You Cash Out Home Equity?

Before you rush to cash out your home equity, make sure you know exactly what the money will be used for. If you need cash for a short-term purchase such as a vacation or clothing, you may want to hold onto your equity. However, if you plan to make improvements that could raise the value of your home or pay education costs, tapping your home's equity may make sense.

Lenders have gotten tougher with approving mortgage loans, especially for people with bad credit. Make sure you check your credit report to determine if you need to clean up your finances before applying for a loan. In today's economy, lenders want to know that your income will cover monthly payments and that you won't default on your loan.

Source:

Bankrate, "When is cash-out refinancing a good option?" by Holden Lewis



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