Benefits of Cash Out Refinancing
When a homeowner would like to obtain some of the equity on their property, refinancing is one option; another option is a home equity line of credit. The process is call cash-out refinancing and is beneficial when the homeowner does not want to sell his property but would like some extra money for repairs, remodeling, paying off debt or personal use, etc.. However, it is important that the homeowner understand positive and negative aspects of a cash-out refinance.
A cash-out refinance can be a low-cost way to borrow money. Lower mortgage rates may be available for example and the loan is paid off over several years.
Home equity line of credit uses the equity in a home as collateral for the loan. Home equity lines of credit normally will have a higher rate of interest but is more flexible with regards to withdrawals and payments to and from the account.
The money received from cash out refinancing needless to say should be spent carefully. Keep in mind It will take the next 30 years to pay off the monies. Some good considerations to think about are paying off debts with high interest rates, invest in more property, home improvements.
Definition of Cash out Refinancing
Cash out refinancing means when a loan is taken out on the homeowner’s property the amount of that loan is higher than the current mortgage on the property.
The current mortgage on the property must be at what’s called a loan-to-value level. The loan to value (or LTV ratio of a property) is the percentage of the property’s value that is mortgaged. (EXAMPLE: assume you buy a home worth $100,000. If your mortgage is for $80,000, then your loan to value ratio is 80% because your loan of $80,000 is 80% of the home’s total value.
(EXAMPLE TWO: , the home’s value is $500,000 and the current loan balance $350,000. The homeowner would like to have $50,000. The home could be refinanced for $400,000. The old mortgage would take $350,000 of the financed amount to pay it off, and the homeowner would receive the other $50,000. The payment on the new mortgage would be based on the mortgage rate currently in effect.
Something to Think About
The foremost fact to consider for a cash out refinance is the equity in the home. The costs of refinancing can be expensive; as much as several thousand dollars. The homeowner should make sure there is enough equity to cover this cost and yet leave enough money for the homeowner.The cost for refinancing is paid at closing. If the payment is not forthcoming at closing then the amount is taken from the cash-out portion of the loan