Remember the Mother Goose rhyme about the old
woman who lived in a shoe? That is so 18th century. Today she would
live in a piggy bank, and so would her neighbors.
Homeowners today treat their houses like piggy banks, readily transforming
their equity into cash and credit. You have home equity loans (still
sometimes called second mortgages), home equity lines of credit
and reverse mortgages. Then there's cash-out refinancing.
Cash-out refinancing explained
With cash-out refinancing, you refinance your mortgage for more
than you currently owe, then pocket the difference.
Here's an example: Let's say you still owe $80,000 on a $150,000
house, and you want a lower interest rate. You also want $20,000
cash, maybe to spend on your kid's first semester at Princeton.
You can refinance the mortgage for $100,000. That way, you get a
better rate on the $80,000 that you owe on the house, and you get
a check for $20,000 to spend as you wish.
Cash-out refinancing differs from a home equity loan in a couple
of ways. First, a home equity loan is a separate loan on top of
your first mortgage; a cash-out refi is a replacement of your first
mortgage. Second, the interest rate on a cash-out refinancing is
usually, but not always, lower than the interest rate on a home
Another difference: You have to pay closing costs when you refinance
your loan; you don't have to pay closing costs for a home equity
loan. Closing costs can amount to hundreds or thousands of dollars.
Finally, it doesn't make sense to refinance a higher amount at
a higher rate. If your current mortgage is at a lower interest rate
than you could get now by refinancing, it's probably better to get
a home equity loan.
Is cash-out refinancing right for me?
So, if you want to extract a chunk o' change from your three-bedroom
piggy bank, how do you decide whether a cash-out refi is right for
It depends on how much you would save each month and what you want
to spend the money on.
Let's take the example of the mythical Jack and Jill Bankrate.
They took out a $100,000 mortgage on a $130,000 house in early 1992.
Their interest rate was 9.95 percent, making their monthly payment
$873.88 (plus taxes, insurance and other extras).
For 11 years, Jack and Jill have been so busy fetching pails of
water that they never bothered refinancing. Now it's early 2003,
and they qualify for a rate of 5.75 percent. They still owe $88,400
on their mortgage and they want to grab $20,000 cash to pay for
Jack's cranial surgery. They could refinance $108,400 at a cost
of $632.59 a month for 30 years, allowing them to pocket the $20,000.
Over 30 years they would pay $227,733.47.
Or they could refinance the $88,400 at a cost of $515.88 a month,
then take out a $20,000 home equity loan at 7.6 percent for 20 years.
That would cost $162 a month. Added together, they would pay $677.88
a month for 20 years, then $515.88 a month for the last 10 years.
Total cost over 30 years: $214,679.23.
With the latter option, they might struggle with higher payments
for 20 years, but will save about $13,000 over 30 years. Which option
they take is a matter of personal preference.
When you decide whether to do the cash-out refinancing option,
keep in mind that you'll have to pay private mortgage insurance
if you end up borrowing more than 80 percent of your home's value.
If you would have to pay PMI, it might be cheaper to take out a
home equity loan.
Article continued at http://www.bankrate.com/brm/news/loan/20010824a.asp?prodtype=loan