Cash Out Refinancing
The difference between what you owe on your mortgage and what you home is worth is your equity in the house. If you’ve owned your home for a long time or if housing prices in your area have increased, the amount of equity you have in your home can be substantial.
One way of tapping that equity is selling your home but if you’d like to stay where you are, there is another way. One form of refinancing is called "Cash Out" because it’s a way of taking cash out of your home equity. It means refinancing but taking out a loan for more money than you currently own. You get to pocket the difference between the old loan and the new one.
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It can be a great way to tap into the cash reserves that are tied up in your home. It can also be a way to get into serious financial trouble and lose your home. So, before you take out this type of loan, take a careful look at what you’re signing.
If the interest rate on the new loan is less than your old loan, you may come out ahead. But just looking at rates is not enough to know the total cost of the refinance. Every time you take out a new loan there are costs associated with the refinance. Some of them can be deal breakers.
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One item to look at is the number of points you’ll be paying. One point is equal to one percent of the loan amount. The more points you pay, the lower your interest rate. Some banks will even roll the points into the new mortgage amount. When it comes closing time, the bank will take the money for the points out of the amount you’ll get to take home.
Another gotcha to look for is variable interest rates. Its easy to calculate the savings if you go from one fixed-rate loan to another but the process is less straight forward with variable rates. Interest rates have been at record lows. It’s reasonable to guess that they’ll go up from here. Make sure that once you’ve spent the money from your cash out refinance that you’ll be able to afford the payments if interest rates go up.
Remember that when you take out a home loan, it’s a long-term commitment. Make sure that you understand what you’re signing and that you can live with the loan terms for many years to come.
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