Cash-Out Refinance

Sam · Posted: Thu Apr 01, 2004 4:14 am Post subject: Cash-Out Refinance

Cash out Refinancing is the process of taking a new mortgage loan greater than the unpaid balance of the existing mortgage, keeping the same property as security for the debt. Through this process a borrower can pay off the existing loan as well as utilize the extra cash for other purposes.

For example, suppose Kris took a mortgage loan of $1, 20,000 to purchase a house. He still owes $70,000. He also wants $25,000 as cash. So he takes a new mortgage loan of $95,000 with the same property as the collateral. This is known as cash out refinancing.

Features:

One should choose cash out refinance mortgage only when the current market rate is lower than the interest rate on the existing mortgage.
The loan amount in cash out refinancing exceeds the amount of existing mortgage that is left to be paid.
A borrower has to pay for the closing costs associated with cash out refinance loan.
The interest on cash out refinance loan is tax-deductible, so it prevents a borrower from paying extra taxes.

Benefits:

Cash out refinancing helps to generate cash from home equity and then use the extra cash for home repairs and paying off other debts.
One can also shift from an adjustable rate mortgage to a fixed rate mortgage and vice-versa but this depends on how much a borrower can save due to prevailing market rates.

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