Business & Finance mortgage

What Is Cash Out Refinancing?

    Significance

    • A cash out refinancing allows a borrower to utilize the built-up equity in her home in any manner she deems necessary. Many times, borrowers use this type of refinance to consolidate a first and second mortgage debt, as well as any other outstanding debts they have accumulated. This gives the borrower a lower total debt monthly payment and allows for ease of budgeting while paying down large sums of debt.

    Function

    • A cash out refinancing can also allow a borrower to reduce his overall interest expense if mortgage rates have dropped significantly. This lower interest rate will be applied to all debts consolidated or created by the new mortgage, allowing the borrower to capitalize on the lower interest rates.

    Features

    • A cash out refinance mortgage can be a fixed or variable interest rate debt, with a term ranging from 10 to 50 years. Most cash out refinances are 15- or 30-year term debts at fixed interest, to ensure that the monthly payment does not vary over the life of the mortgage.

    Considerations

    • Although many borrowers consider cash out refinancing a good tool to get rid of higher interest rate debt, such as a car loan or credit card debt, it moves a short-term debt to a long-term debt. This means the borrower will probably pay more interest over the life of the debt than if he'd simply paid the debt in the short term. However, borrowers with large amounts of debt might find that cash out refinancing is the only way they can pay down the debts and get ahead in the long run.

    Misconceptions

    • A cash out refinancing is not a cheap option for debt repayment. According to the Federal Reserve, the average mortgage refinance in the United States costs the borrower between 3 percent and 6 percent of the loan amount. This makes cash out refinancing a serious financial decision that the borrower should not enter into lightly.

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