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Cash Out Refinancing
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Cash Out Mortgage Refinance
Cash out refinancing is where a home owner can utilize their equity when refinancing to receive additional funds against their home equity in a refinance loan. This cash out is above the principal of the existing mortgage and any closing costs.
The additional money can be used as the borrower sees fit. The typical scenario is when enough principal has been paid off the existing mortgage or when the value of the home has risen significantly, thus providing the borrower with the home equity that can justify the increase in the refinancing loans principal. The new mortgages interest rate should be significantly lower than your other debts in this situation, however, it is important to be aware that you are effectivley increasing the term of these loans to the term of the cash out refinance mortgage. For example, for a $20,000 personal loan at 12% interest, over a 5 year term with say a $444.89 monthly repayment, if a cash out refinance was used to pay off the personal loan this may result in a lower interest rate (say 5.5%) but this credit is now being amortized over the term of the refinance loan (for example 30 years). To get a feel for the sort of impact this might have, we can use this debt consolidation calculator. In this situation, the repayment on the personal loan component of your principal would lower to $113.56, however as you are now paying this loan over a 30 year period, you will pay an extra $14,187.49 in interest (on the $20000 component of the principal) over the term of the loan. Such a consolidaiton may also mean that the original asset that was purchased with the personal loan may have a much shorter life than 30 years even though it is being refinanced for that period. Different cash out and consolidation situations will have different advantages and disadvantages, and it is alway important to perform through research and calculations on whether this if favourable to your situation. |
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