Cash-Out Refinance Rules

If you decide on a cash-out refinance option, there are some rules and guidelines you should know. A cash-out refinance is when you refinance your current mortgage with a bigger loan and take the difference as cash. The costs you incur when you refinance are also factored into the amount.

Equity

If you have a home valued at $100,000 and your mortgage balance is $65,000 you could use some of the equity as a cash-out refinance option. Generally lenders don't allow you to take more than 80 percent of your home's equity in a cash-out refinance. You increase your equity position by paying down the principal of your loan and through appreciation of your house.

Purpose

When you refinance, the equity can be used for a number of purposes, such as home improvements, tuition, taxes, investments or to consolidate your other debts. The equity in your home will decrease by the amount of the cash-out when you refinance.

Interest Rates

When you get ready to refinance your first mortgage loan, you may want to take interest rates into consideration. When rates are really favorable it could be a good idea to refinance with a cash-out option and keep the loan as single loan. Less-than-favorable rates could make you decide to take out an additional loan separate from the first mortgage loan, such as a home equity loan or home equity line of credit.

Terms

A cash-out refinance gives you the opportunity to receive new terms and conditions. You can adjust the term of your mortgage from 30 to 15 years or vice versa depending on what you want to accomplish. You may be able to switch from a variable rate to a fixed rate, or from a fixed to a variable.

Warning

Doing a cash-out refinance can be risky, especially if you are using the money to go on a trip or pay for purchases not related to your home. If your cash-out refinance results in higher payments and you run into financial difficulties, you could run the rsik of losing your home to foreclosure.

Costs

When you refinance for a cash-out refinance, there will be costs. You could incur an appraisal fee, closing costs, title insurance, inspection fee and credit report costs. It's a good idea to stay in your home long enough to recoup your fees to make it worth your while. If your fees are a total of $3,500 and your original payment is $1,500 and the new payment is $1,400, this information can be used to determine how many months are needed to recover your fees. The costs divided by the difference in the payments means 35 months is the time frame needed to recover your fees ($3,500/100 = 35).

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