Cash Out Refinancing Loan

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Cash Out Refinancing Frees Up Money

Homeowners needing an immediate lump of cash may wish to negotiate a cash-out refinancing loan from mortgage lenders. Unlike a home equity loan, which involves adding an additional loan to your existing mortgage, the cash-out refinancing loan pays off the original home loan -- and then some.

For example, a homeowner with a $120,000 balance against an initial $225,000 mortgage may be able to obtain a $165,000 cash-out refinancing loan. From the new loan, the homeowner can apply $120,000 to retire the original mortgage and pocket $45,000 for personal use. This solution may be practical for those who receive the cash-out loan at an interest rate lower than the rate of the original financing.

Using a Cash-Out Refinancing Loan Wisely

Financial advisors will remind homeowners that, with a cash-out refinancing loan, they'll get cash from the transaction, but will have to pay up to several thousand dollars in closing costs. This can be worth it if the drop in rate from the original loan to the new loan is significant, but otherwise, it may be wise to examine other options, including a home equity loan, which also delivers cash out, but which leaves the original loan in place.

Typically, homeowners need the immediate cash to shore up another investment, pay off outstanding debts that may affect their credit standing, or finance a major family expense, such as a wedding, college education, or automobile. Funding these types of expenses with a mortgage can deliver interest rates that are lower than other loan types, and mortgages can carry tax advantages.

While not required, it's considered a prudent gesture for those who decide on a cash-out refinancing plan to invest some of the money right back into the improving the property such as a remodel, renovation or home addition.  

In calculating how much cash out to apply to the refinance, consider the effect on the monthly payment, the amount of interest that will be paid on the "cash out" portion over the lifetime of the loan, and any options the terms of the loan provides for paying back the additional cash quicker (thus saving on the interest). Some loans make it easy to make additional payment than others. Other provide restrictions or may even have early payoff penalties. Undertanding the terms of a loan is always important.

Finally, the homeowner should consider the effect the cash-out amount will have on their home equity. It is good to retain some equity in the home, especially if there is a possibility that a need will arise to sell the home before equity can be re-established. Home values may rise, and they may fall. Homeowners should retain at least enough home equity to pay for the cost of selling a home, even if home values drop and they are forced to sell for less than the home was worth when the refinancing took place.

A cash-out refinance has a lot to offer many homeowners whose current mortgage has a higher interest rate than is available today, and who have sufficient home equity. For these homeowners, this loan option may provide an outstanding value versus other types of financing.

LoanBiz.com offers a number of mortgage calculators that can assist potential borrowers in evaluating the advantages of a loan they are considering.

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