Cash out refinance can be defined as the process of taking out a new mortgage at an amount that exceeds the current balance on the existing mortgage in order to refinance the original mortgage and acquire additional cash for other purposes.
In simple terms in cash out refinancing you refinance your old mortgage for a new one that makes you owe more but in between you pocket the difference between the two.
For instance if the worth of a house is $80,000 and you owe $40,000, you can refinance the mortgage for $80,000 and keep the extra $40,000 in your pocket.
Cash out refinancing is an ideal way to gain some instant cash to serve different needs such as paying college tuition fees of your child, home renovation etc.
Though beneficial, cash out refinancing can prove fatal at times.
So there are several do's and don's that should be carefully studied prior to switching on to this option.
oIn order to reap handsome gains, make sure that the interest rates on the refinanced mortgage are less.
If this is not the case then refinancing is the apt option only when you are badly in need of money.
oThe good amount that you incur in the cash out refinancing option should be used judiciously because you will have to make payments for it till next thirty years.
Therefore you should avoid spending the money on buying unnecessary luxury items such as cars, home theatres, vacationing out etc.
oUnlike the home equity loans the cash out refinancing option comes with closing costs too.
These closing costs can be as much as several hundred thousand dollars.
So if you cannot afford to pay the closing costs, it is better that you do not go for this option.
oMoreover the interest rates charged on a mortgage keep on fluctuating in accordance with the market trend.
Adjustable rates of interest are not useful if the interest rates fall.
If in response to it you end up taking a bigger loan and extracting cash, in the years that follow you will run into huge debts for sure.
oAn individual should be very careful regarding the manner in which he plans to spend the money gained from cash-out refinancing.
If the payments are to be stretched to 15 to 30 years, money should be invested in valuable things or things of immediate requirement.
oAs currently the housing market is retreating, taking a second loan to do up ones house thinking to take cash out of your increased home equity is not at all a wise idea and therefore should be dropped completely.
oIf your current mortgage is at a lower interest rate than what you might get after refinancing, a home equity loan will be the right choice instead of the cash out refinance option that will also burden you with the closing costs.
oThe cash out refinancing is an ideal option if your household actually stands in need of additional cash at present.