When to Consider a Cash Out Refinance Loan

Taking a cash out refinance loan provides homeowners the opportunity to leverage the equity in their homes. This extra money could be used to help consolidate existing debt, pay for medical bills, or make improvements and increase the value of their home. That being said, this type of loan is not always a good option, depending on the homeowners current situation.

Here are three times when a homeowner could turn to a cash out refinance loan for funding.

A cash out refinance loan could be considered if you have lots of equity already built into your existing mortgage. In order to avoid PMI (private mortgage insurance), a homeowner must have at least 20% equity build up into their home. This means that the amount of the new loan plus the extra cash out must not exceed 80% of the value of your home.

As housing prices continue to decline, now may not be the best time to consider this type of loan. On the flip side, homeowners with years of built up equity may find that now is the perfect time to apply for a cash out refinance loan to take advantage of historically low interest rates. The extra cash could be used for renovation projects around your home that have gone unnoticed for years.

Are you planning on staying put in your home for several more years? If you answered yes, then a cash out refinance loan may be a viable option for you. As with any mortgage, there will undoubtedly be closing costs that could run a few thousand dollars, depending on the amount that is financed. In many cases, these types of loans that payout cash to the borrower typically have higher closing costs than a typical refinance.

Before you jump at the chance to get your hands on some extra cash through a refinance, make sure to calculate the break even on the costs associated with the loan. If the amount you are saving each month won’t allow you to break even before you may consider moving, then this type of loan is probably a waste of time.

Is your current interest rate higher than current market mortgage rates in your area? If the answer is NO, then there are better options than a cash out refinance loan. Unless a new refinance rate is considerably lower than your current mortgage rate (usually at least 1% lower), your new monthly payment will be higher.

The whole point of refinancing is to either save money on your monthly payment or shorten the terms of your loan. If your current mortgage terms cannot be improved, then a cash out refinance loan does not make good financial sense. There is no reason to spend extra on a monthly payment or increase the number of years on a loan just to take out extra cash. There are other options available for seeking the required capital.

Applying for a cash out refinance loan has several advantages that can help a homeowner get money to reinvest back into their home. As long as the homeowner has built up enough equity, plans to stay put for several years, and have a current mortgage with terms that can be improved – this is a viable option to seek the needed funding. Homeowners who don’t meet these criteria should look for other means of finding the extra cash, such as a home equity loan.

What success have you had in taking a cash out refinance loan? Would you recommend it to other homeowners in the same situation?