A cash-out refinance is like a regular refinance except that the total amount of the loan is greater than your current mortgage balance, and you walk away from the closing table with the difference in the form of a check made out to you, which could be used to pay off high-interest credit card debt, auto loans, or for anything you like.
Cash out refinance, or refi, can be a useful tool to pay down credit card or other non-deductible debt. Be cautious spending the cash out frivolously because it ultimately must be repaid.
The upsides to a cash out refi are cash-in-hand and that the interest on the mortgage is tax-deductible, specifically that the cash-out interest portion of the refinance is deductible, whereas credit card debt is not.
The downsides are that the cash you take comes directly from your equity, and if your financed amount exceeds 80% of your home's appraised value you'll wind-up paying PMI.
If the Cash-out Loan Amount is less than 70% of the homes value (70% LTV) most banks will give you a better interest rate. If the LTV exceeds 70% you will usually have a higher interest rate, or pay up front in the form of points, or additional origination costs.
There are loan programs were you can accept a slitghtly higher rate in order to avoid having to pay PMI.
Cashing Out the equity in your home to pay off high interest credit cards could potentially save you hundreds of dollars each month.
If you do need cash for a project or something of that nature, then using your home's equity is a great idea. If you were to borrow against a 401k program, you would more than likely have to pay some sort of penalty. With the cash-out refi, there are more tax advantages to acquiring the money needed. In some cases, you may even be able to lower your interest rate at the same time as taking the cash out.
Remember that there is a three day right of recission with any refinance. So you will not be walking away from the table with a check made out to you. It is in your best interest to plan ahead for this. If you need the cash by a certain date, be sure to apply with you mortgage professional as soon as you know that the money is needed.
If you take out a Cash-Out Refinance mortgage to pay off credit card debts, keep in mind that credit card debts are non-secure debts, you cannot lose your home if you default on this type of debts. A mortgage is secured with your house. If you default on mortgage payments, you could lose your home.
If you are doing a cash-out refinance on an investment property there is no 3 day right of recission and you can usually walk away from the closing with a check in hand (or at least have the check by the next business day).
Cash out refis are very popular and for good reason. The fact of the matter is that there almost no less expensive way to borrow a substantial sum of money than with the first mortgage on your principal residence. Funds that are obtained from a cash out refi are typically used for home improvements, to consolidate other debt, college expenses, vacations and just about anything in life that you might need cash for.
There are many diferent loan programs to refinance into.Do not be intimidated or overwhelmed by the many financing options availible to you today. Your mortgage broker will be able to help you make an educated decision on the loan program that is right for your refinance.
When getting the maximum cash out possible, cash out on the first and cash out on the second, you will need to adhere to strict loan to value (LTV) guidelines.
Cash out is typically used for debt consolidation which ultimately lowers your monthly obligations.
Cash Out Refinance loans are subject to higher Credit and Loan to Value restrictions than no-cash-out refinance loans.
