Home Equity Cash Out

Refinancing a home equity loan to acquire more cash refers to refinancing your mortgage for more than you currently owe, and then putting the difference in your pocket. For example, let’s assume you currently owe $100,000 on a $150,000 house and you want a lower interest rate. Some extra cash would in your pocket would also be nice. You can refinance the mortgage for $115,000, get a better rate on the $100,000 that you owe, and also get a check for the $15,000 that you can deposit and spend as you like.

Cash-out refinancing is different from a home equity loan. Whereas the loan is separate and on top of your first mortgage, a cash out refinancing plan is replacing your first mortgage. In addition, the interest rate you get for a cash-out refinancing is generally (but not always) lower than your home equity loan interest rate. Also, when you refinance your loan, you have to pay closing costs; whereas with a home equity loan, you do not. This is important to remember as such costs can be quite sizable and significant ($100K+ at times).

Keep in mind that it does not make much sense to refinance a higher amount at a higher interest rate than you’re already paying.  If, on your current mortgage, you’re paying a lower interest rate than the rate you could get by refinancing, it’s probably a good idea to go with a home equity loan which would carry greater benefits.

If and when you decide to go with the cash-out refinancing option, remember that you will have to pay private mortgage insurance (PMI) if you end up borrowing more than 80% of your home's value. If you’re going to have to pay PMI, it may be cheaper to take out a home equity loan. Even before you begin crunching numbers, it is a good idea to take time to examine how you plan on spending the money from cash-out refinancing. Is the cash for a short-term purpose or a long-term purpose? Is it for something that will potentially help you to earn more money later (improvement to the house, money to start-up a new business, etc.)?

For a bit more information on the refinancing option, check out our Refinance to Get Cash