There are several reasons why a homeowner may want to refinance her current mortgage. Besides getting a lower rate or switching from an adjustable rate mortgage to a fixed rate loan, she may want to have a cash-out refinancing and receive some money back from the process. Circumstances have to be right for a cash-out refinance to work.
Refinance to a Larger Loan
A homeowner can get cash back from refinancing by getting a new mortgage for an amount greater than the current loan balance. For example, a homeowner currently owes $120,000 on his home loan. He refinances and takes out a loan for $150,000. Of the new loan amount, $120,000 goes to pay off the old loan and the homeowner receives the remaining amount as cash back from the refinance.
Equity Required
To refinance to a larger loan amount, a homeowner must have sufficient equity in the home. Equity is the difference between the home's appraised value and the current loan balance. If the homeowner who wants to get the $150,000 refinance loan has a home worth $200,000, he will be able to get a cash-out refinance. If the home is worth $125,000, it will not be possible to get cash from a refinance. The limit for a refinance loan is approximately 95 percent of the home's value.
Homeowner Considerations
A cash out refinance is a valid way to tap into a home's equity. The interest on a home mortgage may be lower than other types of loans. If the refinance is done in conjunction with a lower rate, the resulting monthly payment may not be much higher than the current payment. The homeowner must realize that the cash out is reducing the home equity, and the net amount realized if the home is sold is lowered.
Alternatives
Alternatives for a homeowner who wants to tap her home equity for cash include a second mortgage or home equity line of credit. The homeowner should compare the costs and interest rates of all three options. If the current mortgage has been in effect for quite a few years at a low interest rate, she may not want to refinance to a new 30-year mortgage. This could significantly extend the time to pay off the home.
Tags: home equity, back from, cash back, cash back from, cash-out refinance
