Cash-Out Mortgage Refinancing

[May 8, 2010.]

 

Using one's home as a piggy bank has fallen out of favor among many homeowners because of the troubled economy and because many people are underwater on mortgage loans. Despite problems with the housing market and the difficulties some borrowers have had qualifying for a mortgage to refinance or purchase a home, cash-out refinancings still exist.

Put Money in or Take It out?

Freddie Mac recently reported that 28% of all mortgage refinancing in the first quarter of this year involved taking cash out of homes and increasing mortgage loan balances by at least 5%. Cash-in refinancing, which involves paying money to reduce a mortgage loan balance, accounted for 18% of all refinance loans.

"In the first quarter, about $9 billion in home equity was cashed out by homeowners when they refinanced their conventional prime-credit home mortgage, the smallest quarterly inflation-adjusted amount in ten years, since the third quarter of 2000," according to the Freddie Mac report. "The main causes of the decline in cash-out refinance were reduced home prices and tighter underwriting standards for loan-to-value ratios."

Does Cash-Out Refinancing Make Sense?

While many homeowners are struggling to hold onto home equity at a time when many people are underwater on mortgage loans, others are wondering if it makes sense to do a cash-out. Here are some things to consider:

—Refinancing a mortgage loan to take money out of your home could increase your monthly payment depending upon current mortgage rates and the balance owed.

—A mortgage refinance involves closing costs, so you need to understand the true cost of replacing your current mortgage. Use a mortgage loan calculator to run the numbers.

—Refinancing at a higher mortgage rate usually doesn't make sense, especially if you have had a home loan for many years and are mainly paying off principal each month.

—Taking cash out of a home during a home refinance could result in mortgage insurance being tacked onto monthly payments.

Why Do You Need Money?

Examine your motives for wanting to take money out of your home. Do you have major medical bills, college expenses, or a lot of debt? Do not tap home equity without knowing what the money would be used for. A cash-out refinance is not a good idea if you simply want to take an extravagant vacation, get a new wardrobe, or buy a home entertainment system. Pulling cash out of a home should be a last resort when you have no other alternatives for addressing a serious financial shortfall.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.