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All About Cash-Out

With cash-out refinancing, you refinance your home for more than you currently owe, then pocket the difference. There are many reasons to do this. One of the most common is to use the money to reduce or consolidate debt or for home improvements. Paying with cash from your mortgage loan helps you avoid paying high interest rate credit card debt. So, instead of paying 20% interest on a credit card balance each month, you can access a low interest mortgage rate of just 3-7%.

Here's how it works. Let's say you owe $150,000 on a $300,000 house and you want a lower interest rate. You also want $20,000 cash for your child's college tuition. You can refinance the mortgage for $170,000 ($150,000 current mortgage plus $20,000 cash-out). Ideally, you'll get a better interest rate on your mortgage, plus a check for $20,000 to spend as you wish.

Before you start pulling money out of your three-bedroom "piggy bank," let's put this in perspective. It generally doesn't make sense to refinance a larger amount of money at a higher rate. You should also consider how you'll spend the money. It's tempting to spend that money on a vacation or car, but do you really want to pay off a vacation to Hawaii for the next 30 years?

The question you need to ask yourself is whether it makes sense financially to refinance your current mortgage to get cash out. You should also evaluate all your options. The two types of mortgages that provide cash-out are home equity loans (often called second mortgages because they simply add a new loan after your existing one) and cash-out refinance loans (these replace the original loan). There is no set rule on which one is better for a borrower, but here are a few things to keep in mind:

  • How fast do you need the money?Your typical cash-out refinance can take 30-45 days to close. Most home equity loans take about half that long to process, which makes them a more attractive option if you need the money quickly.
  • How much are you willing to spend?Many people think a cash-out refinance loan to replace a first mortgage is better because they tend to have lower interest rates than home equity loans. However, you should also take into account the fees required to close the loan. Many second mortgages can be closed without a fee or lender, while a cash-out refinance includes the normal closing costs.
  • What's your current home mortgage rate?As mentioned above, cash-out refinances make the most sense when you can lower the interest rate on your loan and also get cash out. If your current first mortgage is already at a good rate, you may not want to refinance if rates are higher. In this case, choosing a second mortgage, and committing to a more aggressive repayment plan, might make more sense over the long haul.
  • How long are you financing?Most cash-out mortgage refinances have a 30-year term. Second mortgages, however, are more flexible with shorter 15- or 20-year terms. This can save you quite a bit of interest in the long run.

There are many factors to consider when choosing between a cash-out refinance and a second mortgage, home equity loan. Our loan consultants are available to answer questions and help you decide which is best for you.

*APR=Annual Percentage Rate. Sample 30-year fixed-rate loan of $300,000 based on purchasing an owner-occupied, single family residence at 97% loan-to-value with a 4.848% APR and interest rate of 4.250%. Monthly payment of $2,024.49 for 360 months. Loans subject to borrower and property qualifications, not all applicants may be approved. Fees and charges may apply. Effective 3/01/14. Subject to change without notice. Conditions, restrictions, and terms may apply.Equal housing lender.

Equal Housing Lender