Cash-Out Refinance

Frequently Asked Questions

What is a Cash-Out Refinance?

When borrowers refinance their mortgage, they may have the option to draw additional funds for their personal use.  This is called a cash-out refinance.  It allows borrowers to tap into their home equity while also changing the rate and term of their existing mortgage.

As an example, if a borrower currently owes $200,000 on their mortgage, and their home is worth $500,000, they could potentially take out $100k cash and have a new loan balance of $300,000.  

Should I Refinance with Cash-Out, or apply for a Home Equity Loan?

Take a look at your current loan and financial situation, as well as your financial goals, when considering a cash-out refinance.  If you have a high interest rate on your current loan you might want to consider a cash-out refinance.  You may also want to look into a cash-out refinance if your home has gained significant equity and you want to eliminate mortgage insurance payments.  If you currently have a low interest rate and no mortgage insurance payments, you may want to consider a Home Equity Loan, since it does not impact your current loan terms.

When should I Refinance?

Depending upon current loan terms, monthly payment amounts between the original loan and the cash-out refinance may not change much if interest rates are favorable.  If refinance rates are not favorable, another option to tap into home equity is to borrow funds with a Home Equity Loan.  Talk to a loan specialist to help determine which option is best for your needs.

Another reason to consider a cash-out refinance instead of a Home Equity Loan to tap into home equity, is if your credit score has gone up significantly, or if you are paying mortgage insurance, or if you have a higher credit score than when you first got your mortgage.  Each of these factors may lower your refinance rate.

What type of loan should I get?

This is one of those mortgage questions that doesn’t matter much until rates increase.  With low rates most people choose a 30-year fixed rate mortgage.

However, there are a lot of home loan options, including different length fixed-rate mortgages and adjustable-rate mortgages (ARM), along with conventional loans and government loans, such as FHA and VA.

For example, a 5/1 ARM might come with an interest rate 1% below a 30-year fixed, and it’s still fixed for the first five years.  If you’re comfortable with an ARM, you can explore the many options available. 

If you decide you want a fixed-rate home loan, you can determine whether a shorter-term option like the 15-year fixed is a better option.  Also consider the FHA vs. conventional pros and cons to ensure you’ve covered all your bases if trying to decide between those two loan types.

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