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.