Cash-Out Refi

Cash-Out Refi

Refinancing for an amount in excess of the balance on the old loan plus settlement costs.

When the main objective of a refinancing is to raise cash, the relevant question is whether the cost of raising cash in this way is higher or lower than raising the same amount of cash with a second mortgage.

A cash-out refi with an interest rate below the existing rate is likely to be less costly than a second mortgage. If the cash-out refi rate is higher than the existing rate, the second mortgage is likely to be cheaper, even though the second mortgage rate may be well above the cash-out refi rate. The reason is that the second mortgage allows the borrower to retain the lower rate on the existing mortgage.

For example, assume the existing loan has a balance of $200,000 at 7%, the borrower needs $40,000 in cash, the rate on a $240,000 refi is

7.5%, and the rate on a $40,000 second mortgage is 8.5%. The second mortgage is the better deal. While the borrower is paying 1% more on $40,000, he avoids paying .5% more on $200,000.

Other factors are involved, however, including mortgage insurance, settlement costs, and taxes. Calculator 3d on my Web site pulls all of them together to determine the less costly option. If you want to use the cash to consolidate existing debt, use calculators 1b or 1c.

Warning: Because the APR on a cash-out refi ignores the loss of the existing first mortgage, comparing it with the APR on a second mortgage is meaningless.
References in periodicals archive ?
The loan amount must comply with loan-to-value ratios of other cash-out refi programs, typically 70-80 percent of value.
The interest rate must be compatible with that of other cash-out refi loans with similar ratios and transaction specifics.
Financing available through Florida Choice Bank and Countrywide lenders via cash-out refi of your current home with loans of up to 100% LTV with a Minimum of 680 credit score with proved income and assets.
The disappearance of cash-out refi money could dampen the economy.
RESULTING LOAN AMOUNT AFTER A CASH-OUT REFI 5% Higher Loan Amount Lower Loan Amount 2002 Q1 61 10 Q2 63 10 Q3 44 19 Q4 40 22 2003 Q1 41 13 Q2 33 15 Q3 34 17 Q4 44 21 2004 Q1 42 14 Q2 43 15 Q3 59 15 Q4 56 19 2005 Q1 64 10 Q2 74 9 Source: Freddie Mac Note: Table made from bar graph.
We have institutional buyers looking to make steady cash returns instead of local entrepreneurs able to do a cash-out refi in five years or a flip in three.