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Cashout Mortgage Refinance

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In challenging economic times, it can be difficult for many consumers to secure a loan. But if you have a home with some equity built up, the equity can help you get the cash you need for any reason - home improvements, starting a new business, paying unexpected bills. For many homeowners, refinancing a mortgage in exchange for cash is an appealing alternative to seeking a new loan.

What is a Cashout Refinance?

Cash out refinancing means replacing the current mortgage on your home with a new mortgage for a larger amount. The difference between the old and new mortgages is considered "cash out" - money that you can use for whatever purposes you wish. A mortgage is a secured loan, so this money doesn't come from thin air: it comes from the equity you've built up in your home.

Take the following example: A family owns a $100,000 home, with $75,000 in equity and a $25,000 mortgage. They'd like to refinance their home to pay for kitchen renovations, so they take out a new mortgage for $55,000. The new mortgage lender pays off the previous mortgage ($25,000) and $30,000 is considered "cash out" that can be spent on the renovations, leaving the family with $45,000 remaining equity in their home.

Because a mortgage is a secured loan, it's possible for even people with less than perfect credit to refinance a home, although falling real estate prices can make this opportunity less viable for homeowners whose property values might suddenly be the same as (or less than) a current mortgage. If there's little to no equity in your home, then it's impossible to pull cash out by refinancing.

Choosing to Refinance Your Mortgage to Get Cash

  • Finance home repairs or renovations
  • Pay a child's college tuition
  • Invest in a financial opportunity
  • Start a new business
  • Pruchase a second home or rental property
  • Buy a new car or pay for a vacation
  • Pay off medical bills or credit card debt

When to Refinance Your Home

If you're thinking about refinancing your home to get cash, there are a number of factors to consider. Sometimes interest rates, mortgage closing costs, and the state of the economy can make a home equity loan (also known as a second mortgage) a better idea than refinancing your mortgage.

If you can switch out your present mortgage for a new mortgage at a lower interest rate, and avoid paying substantial closing fees, then refinancing your home would probably be the least expensive loan you'll be able to find. But if interest rates on a new mortgage will be markedly higher than what you're currently paying, or if closing costs on your present mortgage will cost you thousands of dollars, refinancing may not be your best option.

The viability of a new mortgage also hinges on the amount of money you want to receive. If you only need $10,000 for a new car or $5,000 for a family vacation, refinancing your mortgage is probably not the most economical way to borrow it, since you could spend half that much in closing fees. Even if interest rates are lower now than they were when you took out your mortgage, it might not be worth that sum in fees.

On the other hand, a larger loan might cost you more if you borrowed it as a secured home equity loan, so refinancing your mortgage is often a smart option if you need to fund major home repairs or purchase a second property. It's a good idea to contact several financial institutions and ask them for a no-commitment quote on both options to help you determine which is best for your circumstances and in the present economy.