A cash-out refinance is a way
to make some money off the equity you’ve built in your home. It replaces your
original mortgage with a new loan for more than what you currently owe. In a
way, you are reselling a portion of your house that you now own (the equity)
back to a lender for cash. You then restart the process of paying this
Why would someone go this route instead of taking out a personal
loan? There is a much lower rate of interest on the money you’ll get in a
cash-out refinance, and, if you are using it for home improvements, you can
deduct the full interest amount on your taxes.
This being a refinance,
you should also be looking for a better interest rate than you have with your
current mortgage, even though you’ll probably be extending the period of your
Not a Home Equity Loan
Home equity loans, commonly known as “second
,” are separate loans from your original mortgage, essentially
liquidating some or all of the equity in your home. Your original mortgage stays
the same, and now you’ve added a second loan on top of it.
refinance, on the other hand, replaces your existing mortgage with a new one. If
the market has better interest rates now than when you got your initial
mortgage, you’ll probably want to kill two birds with one stone and do a
cash-out refinance. If, however, you still want to borrow against your equity,
but the new interest rates will negatively affect your current mortgage, you
might take out a home equity loan separate from your mortgage.
Some Points to Consider
- A new mortgage could mean that you have to pay private
mortgage insurance (PMI). If you are borrowing more than 80% of your home’s
value, the lender will want some protection in case you default. This may or may
not make the difference between a second mortgage or a cash-out
- Whatever you take this loan out for, you’ll be paying it off for a long
time. Weigh your need/desire for the cash against the fact that it might not be
taken care of for 15 to 30 years.
- You might not have to pay closing costs on a home equity
- If you are quite far into paying off your mortgage, refinancing is probably
not the best option.
So, the equity you’ve built up in your home can
be used right now; it's not just a representation of how far you’ve come in
paying off your loan. It is important to be careful, however. Without doing the
proper research, you could end up a lot more in debt than you were before and
with not much to show for it.