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Cash Out Refinancing
With cash-out refinancing, you refinance your mortgage for more than you currently owe, then pocket the difference.
Here's an example: Let's say you still owe $80,000 on a $150,000 house, and you want a lower interest rate. You also want $20,000 cash, maybe to spend on your child's first semester at Princeton. You can refinance the mortgage for $100,000. Ideally, you get a better rate on the $80,000 that you owe on the house and you get a check for $20,000 to spend as you wish. |
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Cash-out refinancing differs from a home equity loan in several ways:
- A home equity loan is a separate loan on top of your first mortgage.
- A cash-out refinance is a replacement of your first mortgage.
- The interest rates on a cash-out refinancing are usually, but not always, lower than the interest rate on a home equity loan.
- You pay closing costs when you refinance your mortgage.
- Generally, you don't pay closing costs for a home equity loan.
- Closing costs can amount to hundreds or thousands of dollars.
It doesn't make sense to refinance a higher amount at a higher rate. If your current mortgage is at a lower interest rate than you could get now by refinancing, it's probably better to get a home equity loan. Or, if you're 20 years into a 30-year mortgage, you're paying more principal than interest with each mortgage payment.
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