Cash Out Refinancing Lowdown

When should you opt for Cash-out-refinance!

Every one likes the feel of money in their hands and there is always a need that can be met with the extra dollars that come by. Cash-out-refinance gives you the option of getting additional cash while trading the current mortgage for a new one. Say you still have to pay $70,000 of the $150,000 mortgage that you had taken. To top this, you need an additional $30,000 to meet house renovation expenses. You can take a fresh mortgage for $100,000 and continue to pay your monthly installments as before.

The additional cash that you have thus received helps you tide over your current cash need. However one has to judge the cash requirements and then opt for this option. Generally legitimate requirement for additional money is seen in cases like for house renovation, debt consolidation, college tuition, purchase of a new vehicle, emergency expenses and the likes.

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The new emerging face of cash-out-refinance

Freddie Mac, the mortgage investment giant recently revealed that a lot of people, who got their houses refinanced, did so at a higher rate. The percentage of people who did this is almost as high as almost 9 out of 10 homeowners. And this trend is like to continue. 2-3 years back the scenario was a bit different with most of the people getting their homes refinanced at a lower rate. However this seems to have changed dramatically in 2006. With the interest rates showing a consistent upward trend, people are discovering the benefits of having fixed rate cash out refinance deal.

Therefore they are not looking for bargain deals as they want to avoid a situation wherein they may be faced with a double digit interest rate which quite a possibility in the case of floating interest rates. Therefore they are trading their old mortgage for a new one albeit with a fixed rate of interest which costs more than their old mortgage. But given their need for additional cash, and the added advantage of a fixed rate of interest the deal seems to be satisfying for them. Lat Times reports:

Cash-outs may be booming, but they are not new. They've existed for years as a financial tool to extract equity and convert it to immediately spendable money. During the refi boom years of 2003 and 2004, for example, anywhere from a third to half of all refinancers pulled out additional cash.

Cash-out Refinancing Vs Home Equity Loan

Ever wondered how Cash-out Refinancing is different from Home Equity Loan? Home equity loans are sometimes referred to as second mortgages. It is like taking a second loan on your current mortgage. However cash out refinancing is essentially refinancing your current mortgage for a higher amount than you currently owe.

When one opts for cash out refinancing he does so with the knowledge and intention that the interest rate would be lower than that on a home equity loan. Also remember at all times that when you decide on cash our refinancing you have to pay the closing costs of the mortgage. This amount can be very high at times. However when you go in for home equity loan, you are not expected to do so. Also, some times it is better to get a home equity loan than cash out refinancing. This is beneficial especially when the refinancing rate is higher than the current rate.

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The Changing Face of Cash-Outs

Cash-out refinancings are at an all-time high, but that’s not the real news here. Even the fact that more and more people are using this option as a way to gain some extra “spending” money is not new. While the money may go towards something as critical like settling outstanding debts or be used for something as frivolous as a once-in-a-lifetime vacation, the real news is that people are willing to pay a higher interest on the replacement loan.

Freddie Mac, the mortgage investment company, reports that most refinancers are choosing bigger replacement first mortgages with interest rates that average one-half of a percentage point higher than their old loans.

The difference in cash-out refinances effected today and those in practice three years ago is that refinancers in the present are opting for new balances and interest rates that are higher. The economic and financial scenario has also undergone a drastic change – short-term interest rates have risen to 8.25 from 4 percent in 2003 and 2004, and thirty-year fixed-rate first mortgages are touching 7 percent from 5 percent three years ago.

Refinancing Stronger Than Ever

Freddie Mac, the second-largest mortgage finance and home funding company in the U.S., reported that loan refinancing in the second quarter this year had touched a 16-year high of 88 percent. The new loans were at least 5 percent higher than the original balances owed by Freddie Mac’s consumers.

Refinancing activity has been stronger than usual because of the incentives being provided to consumers to cash out on their home equity, says Frank Nothaft, Freddie Mac vice president and chief economist.

Amy Crews Cutts, Freddie Mac's deputy chief economist, expects cash out activity to remain strong throughout the remainder of the year, in proportion to the slow but gradual rise of interest rates. More home equities are taken out due to the rise in short-term interest rates such as the prime rate, she adds. 

The company’s quarterly finance review pegged the percentage of consumers taking cash out of home equity in the first quarter at 86. As much as $81 billion was cashed out during the second quarter of 2006, an increase from the $74.1 billion cashed out during the first quarter, according to Freddie Mac.