Cash Out Refinance Basics

The cash out refinance is a mortgage concept home owners are employing more and more in recent years. The cash out refinance loan is most easily understood by describing it as a combination of a home equity loan and a refinance loan. With this idea, the home owner applies for a new loan to replace, or refinance, his existing first mortgage, but adds to the requested amount a portion of the property equity resulting in a cash out refinance loan. This method allows the borrower to repay the existing mortgage loan, and keep the remainder of the refinance funds for his own personal use.

Cash Out Refinance Considerations

Too many lenders are quick to offer home owners the option of doing a cash out refinance of their homes during the application stage, and far too many home owners are lured into the lender’s trap with greedy thoughts. It is extremely important that borrowers understand that the money they receive with a cash out refinance is not free money, but rather their now tangible property appreciation and home equity. Borrowers who walk away from a cash out refinance with additional money must also acknowledge that they are required to repay that additional money over the course of their new home loan. Therefore, whatever they purchase with that money will actually take thirty years to pay off, and will most likely not be worth that additional interest cost.

Another potential problem with the cash out refinance is the fact that borrowers may be significantly increasing the length of time they will be paying for their home. Depending on how far into the original loan the borrower is at the time of the cash out refinance, the potentially lower monthly payments combined with the additional money will never result in an identical payoff date. Plus, since mortgage companies charge the largest portion of their interest at the start of the loan, a cash out refinance is like starting all over again when analyzing your principal reduction versus interest expense in a an amortization of the cash out refinance loan.

Cash Out Refinance Summary

Before a home owner commits himself to repaying another loan, it is absolutely essential that he understand how the new terms of the cash out refinance will directly effect his situation. The new total amount to be repaid is very commonly ignored or sped past by the lenders during the approval and settlement process. The borrower must also understand that since this type of loan is a brand new mortgage all together, there will definitely be additional closing costs and settlement charges that need to be satisfied.

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