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Getting Cash Out from a Refinance
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Most loan programs allow borrowers to obtain cash out from their refinance transactions as long as they have sufficient equity in the property. In a Fannie Mae conforming loan there is a slight increase in the rate when a borrower is borrowing more than 70 percent of the value of their property and is taking cash out.Be careful not to squander your home equity. Sadly, in many cases a family will take cash out of their home equity to pay off high interest rate credit card debt but only a few months later have the credit cards charged up again. In this instance you have traded unsecured credit card debt into a secured debt the lender can and will repossess: your home!
Refinancing with Cash Out is an option but if you are borrowing more than 70% of your home's value, you can expect a little bit higher of an interest rate than if you weren't refinancing with cash out.
Once you borrower over 80% of the value of your home you will have to pay PMI (private mortgage insurance) and you will most likely see a slight rate increase the higher the LTV (Loan to value) that you go with a cash out refinance. Sometimes when doing a cash out refinance it may be better to either do it as a first and second mortgage or to just obtain a 2nd mortgage or a HELOC (Home Equity Line of Credit). This way you can avoid any rate bumps to your first loan and avoid PMI. A licensed mortgage advisor can assist you to find what will work best for you and your individual situation.
Getting a cash-out refinance is a great way to help pay off high interest credit cards. It will help reduce your monthly expenses, and the interest will be tax deductible once it is part of your mortgage.
Your mortgage broker can do a financial analysis of your monthly payments and normally save you hundreds of dollars monthly by paying off high rate cards and/or consolidating other debts you may have.
Lenders consider all loans that either take cash out of closing or pay off debt to be cash-out refinances. Usually a refinance in which you get the lesser of 2% or $2000 will be considered a rate term refinance.
Using cash out of the equity in your home through refinancing or by obtaining a second mortgage or a home equity line of credit has advantages and disadvantages. The main disadvantage is that you are using up the equity in your home. Your home is like a big savings account and everytime you take money out of the equity in your home you are making withdrawls on this savings account. However, this money can be used to pay off higher rate debts, give you peace of mind, provide more money monthly to invest, for home improvements to increase your home's value and many other things. Many times the interest on the full amount of your mortgage loan can be tax deductible also.
It is important to know that although the equity in your home is yours, you can't truly pull it out as if it were a savings account unless you sell your home. If you do cash out the equity in your home through a refinance, you are really just taking out a loan against the equity in your home. It's kind of like having a secured credit card, where you pay interest on the balance of the card, even though the bank has enough of your money to cover the amount on the card anyway.
Don't forget that there is a 3 day recission period for any refinance. So if you know that you will be needing the money from the transaction by a certain date, then it would be in your best interest to apply as soon as possible. This will allow you to have your money in time, in case there are any problems during the process.
When you speak with your mortgage professional be sure to tell them how you intend to use the cash you take out, and what your future needs may be. For example if the money you need to access to is a one time expense such as consolidating debt or new siding a home equity loan may work best for you. However if you are planning to use the equity in you home to build a new deck this year, replace siding the following year, and pay for your childs college education in 2 years, then a home equity line of credit may be the best for you. Knowing your needs allows your mortgage consultant to help you make a well informed decision on what program will work best for you and your family.
Lenders will not allow you to take as much cash out when you refinance an investment property as when you refinance your primary residence. Investment properties are considered higher risk loans, so lenders want you to have more of your own money tied up in those loans.
If you have seen substantial appreciation in your home qeuity over the past few years, now may be a great time to realize some of those gains, often without any tax liabilities. Cash Out Refinance loans allow you to pull substantial cash out of your residential properties without selling them, and in many markets this allows you to book windfall profits before values decline in the future.
This post has been filed under : cash out, refinance