HOME Equity Loan Information - A Consumer Guide To Home Equity

Shopping for a Home Equity Loan

Cash-out Refinancing

Cash-out refinancing allows you to access equity in your home by taking out a new mortgage that is greater than your old mortgage. The new mortgage is used to pay off your old mortgage and the difference between the two is your home equity loan.

Since you are replacing your first mortgage with a new one, cash-out refinancing only makes sense when the refinancing interest rate available to you is lower than your current mortgage. The lower interest rate in refinancing will lower your monthly payments on your mortgage. Since there are closing costs associated with refinancing, you should only refinance if the savings on your lower monthly payments can recover the closing costs before you sell your home.

Lets say your closing costs for refinancing were $3,000. The refinancing deal gives you a lower interest rate that lowers your monthly mortgage payments by $150. This means that you must stay at least 20 months in your home to recover the refinancing costs ($20 months * $150 a month in savings = $3,000 refinancing cost). After that time, you have recovered your costs and you are saving money.

Since cash-out refinancing is a first mortgage, it typically has a lower interest rate than a home equity loan which is also a second mortgage. Cash-out refinancing takes longer to process than does a home equity loan.

If cash-out refinancing raises your loan-to-value ratio above 80%, you will be required to pay private mortgage insurance, or PMI. PMI protects the lender if you default on your loan - PMI does nothing for you. PMI costs must be considered when cash-out refinancing has an LTV that is more than 80%.

When you are considering cash-out refinancing, ask about escrow services. The loan's monthly payments may or may not include an escrow amount for property taxes and homeowners insurance. If an escrow amount is not included, you will need to budget for those costs separately.

While the cash-out refinancing is generally available to any homeowner that has built up equity in their home, your first mortgage may have a prepayment penalty clause that does not make refinancing a viable option.

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Cash-out Refinancing
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