Is the Cash-Out Refinance a Workable Solution?

February 22, 2013

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The cash out refinance is a tried and tested route for paying off your existing mortgage to benefit significantly in many ways. Such a loan exploits the difference in valuation of  your home and yourCash out refinancing. Calculating costs principal loan dues. If, for example, your home is valued at $300,000 and your mortgage balance happens to be $225,000, the difference amount, which is effectively a portion of your home equity that is still available to you, can be financed for cash. Either of two situations must exist- the value of the property has to appreciate or the mortgage has to be paid down significantly over the years. Such situations will ensure that sufficient equity will be available for you to exploit through the cash out refinance.

The first step is to take out a fresh mortgage loan for the entire value of the home. The lender uses a part of that money to close the old mortgage, giving you cash for the balance amount of the new loan. The cash will be handy for meeting large expenses like home repairs, and your children’s education and even for consolidating unsecured debts or making investments. The decision has to be carefully thought out because you will not be getting such an opportunity to acquire large sums of money in the immediate future.

A cash out is workable if you happen to experience certain positive developments like a sudden increase in the valuation of your property or a situation where there is a decline in interest rates that could impact you significantly. It is also feasible when you want to move from a higher variable rate of interest to a lower fixed rate of interest to stabilize finances.

A cash-out refinance can also be seen as an opportunity to review the terms governing your existing mortgage like the terms of repayment. You can lower the tenure of payment from 30 years to say 15 years to increase monthly payments and  accelerate your repayment. Alternatively, if you opt for  extending the loan repayment period you could lower your monthly payments to reduce the stress of debt servicing.

Your lender will assess your requirements with a fine toothed comb and one factor that he will keep in mind is the loan-to-value ratio, which means the amount of money that is owed by you in relation to the overall worth of your existing home. You would expect the lender to keep a margin of safety and he will usually  restrict lending to 80 % of the home value. For the borrower it is only workable if he gets enough cash that satisfies his personal needs. Cost is another important consideration. Loan appraisal expenses, mortgage closing charges, title insurance inspection costs, home valuation  fees and credit reporting expenses can add up to a substantial sum, and all such payments need to be made upfront.

It is worth following the cash out refinance only if you have weighed the pros and cons and found that the deal will only improve, not worsen, your financial situation. A strong credit reporting background with a score above 720 is usually insisted upon for such loans as lenders are increasingly finicky about extending cash and low interest  benefits. Lower scores may fetch you higher interest rates that will only increase your debt burden. If a credit check reveals a bad credit track you may have to search other alternatives for emergency funding.

One such alternative is the loan for vehicle title that finances you on the basis of the collateral provided by your car title or pink slip. The cash loan for title is a safer option compared to the cash out refinance because you are not exposed to the risk of losing your  home to foreclosure. The amount financed extends to 60% of the vehicle’s resale value and there are no credit reports, credit appraisals or background checks standing in the way of the auto collateral loan.  The pawn car title loan interest rates are reasonably pegged below 25% APR with shorter repayments that can be completed in three months to twelve months, so the interest burden will be far lower than the cash out refinance.

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