09 Feb Cash out refinancing, cash out refinance, mortgage cash out refinance, first time home buyer
Many homeowners have occasions that arise when they need to get hold of some extra money quickly. Such a situation may arise if you want to do some home decorating; or it may be the case that you want to finance your child’s college education; even still, you may feel yourself overburdened with short-term debt, like your credit cards, and you want to find a quick solution to this. At times like these your financial advisor may suggest to you a number of ways that you can finance these urgent money needs. One suggestion might be that you take out a personal loan. Another may be that you think of a second mortgage. However, as a homeowner, it’s likely that your financial advisor will suggest cash out refinancing as an option you may want to consider. So, exactly what is “cash out refinancing”, and: is this a sensible way to solve your short-term money needs?
Cash Out Refinancing
As its name suggests, “cash out refinancing” is a financing arrangement where the amount of money you receive from new financing exceeds the amount of your outstanding debt. So, for example, say you have a house that is worth $150,000, but where the outstanding mortgage is only $100,000. You need to borrow $30,000 to pay for your child’s college education – but you don’t want a personal loan because the financing costs are too high. In this case you can consider (a) applying for a second mortgage for the $30,000; or (b) doing a refinancing where you ask a lender to lend you $130,000, in return for which you’ll give the lender a mortgage over your house. Should the lender lend you the money, you repay your existing $100,000 mortgage loan and pocket the $30,000 to pay for your child’s college education. The second of these two scenarios is a cash out refinancing scheme.
Why Would I Want To Consider Cash Out Refinancing?
Most of the realistic reasons why homeowners want to consider a cash out refinancing have already been mentioned – like to pay for a child’s college education, or to do some home decorating. However, one reason why more and more homeowners are considering cash out refinancing as a financing option, regardless of whether or not they have an immediate cash need, has something to do with a three-letter word – tax.
As a homeowner, with an outstanding mortgage loan, the interest part of your home mortgage loan repayments are tax deductible against your income. However, if you no longer have a home mortgage loan: you no longer have any entitlement to claim for a tax reduction of your income tax based on your home mortgage repayments. For this reason, it becomes lucrative and financially rewarding for those with money, as well as those without, to consider a cash out refinancing option every now and then so that they can maintain their income tax reduction entitlement.
Having said that: sadly the older you get the less likely it is that you’ll be able to obtain a mortgage over any significant period of time; say 10 to 20 years. So, if you are close to your 50s, in the prime of your career earnings, coming near to the end of your mortgage repayments, this is exactly the time when you could do with a tax reduction – but you’re just about to lose it! In such an event, you should have considered a cash out refinancing option in your mid-40s, before it was too late, taken the holiday of a life-time, and then used the increased mortgage on your house as a tax reduction on your future earnings!
In short then, homeowners may want to consider a cash out refinancing option to:
* pay for their child’s education; * consolidate their debt; * do home improvements; * use it as a tax avoidance scheme. Are There Any Issues To Be Aware Of?
Yes; because of its very nature, applying for cash out refinancing can take some time. For example, to do cash out refinancing you need to have your house’s value appraised by an appraiser (of your lender’s choosing) to determine that the house’s value is indeed the same as what you say it is in your mortgage loan application form. You also need to repay your existing lender, then arrange the mortgage for your new lender. This will all take time. Consequently, whilst cash out refinancing is a superb option available to homeowners, it can rarely be used if your financial needs, as a borrower, are immediate.
Also, when considering the cash out refinancing option, you do need to give considerable thought to what fees and costs your existing lender may charge you. It’s very common to find, in mortgage loan agreements, terms that penalize borrowers if they try and make a full repayment before the completion of their existing mortgage loan – so check this out!
Any Other Consideration If I want to Do Cash Out Refinancing?
Yes; as mentioned cash out refinancing is an excellent option – but you do need to consider some issues, as follows:
* Will my new lender penalize me if I do another cash out refinancing in a few years time?
* What interest rate am I really paying? – check the Annual Percentage Rate (APR); * What fees will I need to pay? – like application fees; appraisal fees; etc.;
* How soon will I need the money – and is a cash out refinancing going to give me the money soon enough?
* Are there any restrictive covenants, in the new home mortgage loan agreement, meaning I cannot do what I want with the house? * Is there not a cheaper way of financing the borrowing? * Are my monthly repayments going to be higher or lower than they already are?
* Can I refinance against the whole appraisal value? – the answer here is likely to be “no”. In most cases your refinancing lender will only allow you the opportunity to refinance up to 80 percent of the appraised value of the house – not 100 percent. In this regard, cash out refinancing is very similar in nature to a mortgage agreement – part equity / part debt borrowing.
And so, if you’re looking to repay your outstanding personal loan, put your children through school, or even pay for that second home near the beach, a cash out refinancing may be the best, and most sensible, option available to you!
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