IN PRINCIPLE APPROVAL
Refinancing or Cash Out
Overview
Refinancing adjusts your mortgage for a better rate/term, while cash-out refinancing uses your home equity to get a new, larger loan for cash, turning equity into liquid funds for investments, debt consolidation, or expenses, but increases your debt and involves costs like fees and potentially higher payments. Choose cash-out for unlocking funds with potentially lower rates than unsecured loans, but weigh the higher debt, closing costs, and risks like negative equity against benefits like consolidating high-interest debt or funding major goals.
Refinancing (Rate-and-Term)
-
What it is: Replacing your current mortgage with a new one, usually to get a lower interest rate or change the loan term (e.g., from 30 to 15 years).
-
Goal: Lower monthly payments or pay off the loan faster.
-
Key: Focuses on the terms of the existing debt, not getting extra cash.
-
What it is: Replacing your current mortgage with a larger new one, and receiving the difference in cash.
-
Goal: Access a lump sum of cash using your home's equity as collateral.
-
Uses: Debt consolidation, home improvements, education, business, investments, emergencies.
-
New Loan Amount: Cash-out increases the principal; standard refinance keeps it similar or lower.
-
Interest Rates: Cash-out rates are often lower than unsecured loans but higher than standard refinance rates because it's a first mortgage.
-
Debt: Cash-out significantly increases your total mortgage debt.
-
Costs: Both have closing costs (legal, valuation), but cash-out can be substantial.
-
Risk: Cash-out adds more debt, increasing risk if property values fall (negative equity) or you can't pay.
-
Refinance (Standard): When interest rates drop significantly and you want to save money on your current mortgage.
-
Cash-Out: When you need a large sum of money for strategic reasons (like investment or debt consolidation) and can handle a larger mortgage payment and increased overall debt.
Always calculate closing costs and your break-even point to ensure the benefits outweigh the expenses.