Cash-out refinancing: Show me the money!
Need cash for college tuition? A home improvement project? To consolidate debt or start a business? You might be able to get that money by exchanging some of your home equity for cash.
What is cash-out mortgage refinancing?
Cash-out refinancing means replacing your current mortgage with a bigger one. The extra money is given to you when your loan closes, and you can use it for anything you like. The more home equity you have, the more cash you’re allowed to take out.
Let’s say that your home is worth $200,000. Most programs allow you to refinance up to 80 percent of that amount, or $160,000 (FHA allows cash-out to 85 percent). If your current loan balance is $130,000, you’d be able to get about $30,000 in cash by refinancing your home loan.
Can the refinance save you money?
Before refinancing for cash-out, make sure that refinancing is a good idea. Mortgage fees for cash-out refinances are higher than those of ordinary rate-and-term refinances. Fannie Mae's Loan Level Pricing Adjustment (LLPA) matrix shows that for a borrower with a 679 credit score, it costs two points more to do a cash-out refinance to 80 percent of the home value than it does to do an ordinary refinance to 75 percent.
If you can’t significantly lower your rate with a refinance, that may not be the best way to get your cash.
Refinancing not the only way to get cash out
If a new home loan won’t save you enough money to recoup the costs of refinancing, a home equity loan might be the best option.
Home equity loan costs are very low. Origination fees come to a few hundred dollars, and some mortgage lenders even waive them. While the interest rate is usually higher, this loan may be cheaper than the cash-out refinance. You could also combine these approaches. Remembering that cash-out refinancing costs quite a bit more than ordinary rate-and-term refinancing, you might get the best deal with a rate-and-term refinance and then adding a home equity loan.
How do you compare a cash-out refinance to a home equity loan? By calculating a blended rate. Supposing your options are:
- A cash-out refinance for $160,000 with an APR of 4.40 percent
- A rate-and-term refinance at $130,000 with an APR of 4 percent plus a $30,000 home equity loan with an APR of six percent
- Keeping a $130,000 mortgage at 4.25 percent and adding the $30,000 home equity loan.
Here’s what it looks like:
|Loan Description||Amount||APR||Proportion||APR* Prop|
|New cash-out refinance||160,000||4.40%||100.00%||4.4000%|
|Home equity loan||30,000||6.00%||18.75%||1.1250%|
|Home equity loan||30000||3.00%||18.75%||1.1250%|
The blended rate calculation weights the interest rates according to the loan amounts, and provides an interest rate for the combination of loans.
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