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Cash out Refinancing

Aug 17, 2007
In simple terms, refinancing a loan means getting a new loan. When new interest rates fall below your current interest rates then you need to take benefit of the lower new rates by refinancing your current loan. If after taking into account all the costs of refinancing you save at least $300 a month, it is worth doing it.

100% Cash out refinancing is a refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.

In this case the homeowner would take out a new loan large enough to cover the first mortgage with enough left over to cover another large expense. The extra amount borrowed is based on home equity. Home equity is the value of your home that you own, in other words, the worth of your home above and beyond the mortgage that you owe. If your home would sell for $150000 and your mortgage is 100000, you have 50000 in equity. Many lenders will allow you to borrow up to 85% of your equity.

The interest rate you pay on a cash-out refinance loan will generally be the same as what you pay on a loan where you don't take cash out. However there may be a small fee associated with a cash-out refinance loan depending on the specific loan you choose and the loan-to-value ratio.

Generally, one gets 70% to 80% of home equity but in 100% Cash Out Refinancing unlike any other refinancing one gets 100% cash. In normal course, people don't know about 100% cash out refinancing, as they need 20 or 30% of equity in their home. So, getting 70% or 80% of the value of their house satisfies them.

However, 100% cash out refinancing is generally taken up by the borrowers who have other expenses standing at their head like bills such as high credit/debts cards, educational expenses, other loan payments etc. So you can get cash out refinancing and payoff all your high interest credit/debt cards and other expenses. Added to this you can also save many dollars each month.

Often mortgage lenders speculate the situation of homeowners who have other bills beside their mortgage payment. They then they offer up to 100% cash out financing option, thus giving those burred with bills peaceful sleep. Many lending company do not offer 100% cash out refinancing but then you can always find out people who do.

Suppose you decide to apply for 100% cash out refinancing then on the lender part it is an 80/20 loan or sometimes 100% one loan depending on your credit. On 80/20 loans, which is a 100%, cash out refinancing loan is amounts to receiving a first and a second mortgage at the same time. The first mortgage covers 80% of the home's value while the second mortgage covers the remaining 20%.

If your home would sell for $150,000 and your first mortgage is 100,000 and second amounts to 50000, thus a 100% cash out financing! After the first couple of years some homeowners realize that their home mortgage is not as good as they originally thought. Some families realize that low interest rate is no longer 'low' as compared to current rates.

Some other realize that a fifteen year mortgage results in monthly payments too high for them to meet or that a thirty year mortgage does not build equity quickly enough. Some may have an urgent requirement of money to spend on wedding, purchase a new car or educational purposes. Cash out refinancing is then an easy technique for such people because it allows the mortgage and the new purchase to be paid from the same monthly bill.
About the Author
Refinance is a key part of business development strategy used by Nazir on a daily basis. Proper use of this financial instrument depends very much on the quality of information upon which any refinancing decisions are based. For your better decisions, visit refinance now at http://www.123refinancenow.com
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