First of all, what exactly is a “cash out” loan or “cash out” refinancing? When we’re talking about homes and properties, cash out refinancing happens when a loan is taken out against a property and that property is already under ownership. In the case of a cash out, the amount of the loan far exceeds the cost of the transaction. Take this example: a homeowner owes $100,000 on his home. His home is valued at $300,000. That homeowner then has $200,000 in equity.
The homeowner can choose to pay that equity with a cash out loan so long as the loan is more than $100,000 (what he owes on his home). Some economists warn that these cash out loans can get exceedingly expensive. If you are a borrower and you take out cash at the time of your refinance, you can be viewed as a risk. Banks and lenders could see you as someone who is in financial distress. If there is great risk involved, then your costs could be raised.
One mortgage expert put it this way:
Whether or not cash is withdrawn is entirely within the borrower’s discretion. But many use the discretion unwisely because they underestimate the cost of the money they take out of the refinance. They view the cost as the rate on the new mortgage, ignoring the higher cost on the existing loan balance.
A cash out deal typically raises the ratio of total cost of loan to actual value of the property. This ratio can be called an “LTV.” It is important to understand that your mortgage interest rate will likely not be affected by this ration. If the ratio gets to a point at which it exceeds 80 percent, the homeowner who is borrowing must then pay mortgage insurance as well. Cash out loans are just one more thing to consider when you’re looking to refinance. To find the best mortgage rate to refinance at, choose Best Mortgage Rates, Inc.!