How Does Cash Out Refinance Work?
Q: I need to fix my house: Should I refinance and get cash out or get a home equity line of credit?Should I get home equity line of credit or refinance with cash out?I want to refinance my home to take advantage of lower interests rates. I also want to renovate my house and fix some things around. Should I refinance and get cash out to use for home improvement or should I refinance without cash out and get a separate home equity line of credit?
A:You would have to refinance the whole existing balance form last year into one. You’re only allowed one home equity loan/line of credit at a time.
The refinancing option basically means that you will borrow more than you already owe on the home, use some of proceeds to repay your existing mortgage and keep the rest. It’s also neater with your home deeds because unlike a home equity loan, you will only replace the current mortgage, not add an extra layer of debt with an additional loan that must be repaid first.
To clarify the process with a cash out refinancing, if you own a home worth $150,000, owe on a mortgage $50,000, then you have equity of $100,000. You could take out a cash out refinance mortgage for $100,000, repay the existing mortgage and have $50,000 deposited into your checking account. You would then be repaying a $100,000 mortgage rather than a $50,000 mortgage. It’s simpler than adding an extra loan to your property with a home equity loan that’s for sure.
Obviously when taking a serious financial decision like this, you want to weigh the pros and cons. Will the new mortgage be affordable? Is it better than a home equity loan? Or should I consider taking out a three or five year loan instead? The interest would be a lot higher, but over a shorter duration, the total borrowing cost would be much less. It really depend what why you need the money and how much?
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