When homeowners refinance their existing mortgage they have plenty of options and choices they need to make. For most borrowers who refinance, the primary motive is more than likely to obtain a lower rate. There are other good reasons, two of which are to refinance out of the instability of an adjustable rate loan into a fixed rate loan and to switch loan terms to save on long term interest. Of course, once the decision has been made to refinance then other decisions must be made as they relate to a specific interest rate. Decisions such as whether to pay points or not or whether to request a lender credit to pay for all or part of the borrowers’ closing costs during the refinance transaction.
The other option borrowers make is whether to pull cash out during the transaction. Pulling cash out during a refinance means taking home additional funds above and beyond the outstanding loan balance and closing costs. If the outstanding loan balance is say $200,000 and the property is worth $300,000, after settling closing costs the borrowers have the choice of pulling out up to 80% of the property’s value above and beyond the loan balance and fees. 80% of $300,000 is $240,000 and if the borrowers decide to pull out as much as they can and closing costs are $4,000 they could cash out up to $40,000.
However, if the primary motive is to access the equity in the home and the borrowers don’t really need to refinance otherwise, a cash out refinance is a pricey option. There are closing costs involved in any refinance and if the borrowers just want to access their equity and pay off some bills or pay for college, there’s a better option- a home equity line of credit or second mortgage.
These loans are subordinate to the existing mortgage and will be in a second position and will have a slightly higher rate compared to a loan for a first mortgage. Not much, but a little. However, the closing costs needed to obtain a home equity line of credit or a second cash out mortgage are minimal. If cash is all the home owners want and a standard refinance doesn’t make sense, a home equity line of credit probably makes more sense.