A cash-out mortgage, also called a cash-out loan, is an option for first-time homeowners who have equity in their home and who would like to borrow against that equity. The basic idea behind a cash-out refinance is to take out a new mortgage at a more attractive rate than the original one, so that the borrower can pay off what had been borrowed against his or her equity. If the borrower has held a mortgage on the property for at least two years, then taking out another one can be easily permitted. However, the first time homeowner should be aware of how these deals work and not simply opt for it because someone recommended it to them. There are several things that borrowers should look for in a cash-out mortgage refinance loan, which we enumerate below.
Cash-Out Mortgage Refinance
Firstly, they should consider how much home equity they currently have and compare that with the value of the new mortgage. Most experts recommend that a new cash-out refinance loan should not be done before the existing debt is cleared (which means that the borrower has paid down two or three years of debt). If the home equity is still reasonably high, then a second mortgage may be more appropriate. Another point of consideration here is to find out whether the interest rates for the second mortgage are better than those for the first mortgage. If you can obtain a better interest rate, then this could translate into significant saving, especially when compared with home prices which are falling as we speak.
The second thing is the repayment schedule for the loan term. Most people who wish to apply for a cash-out mortgage refinance often select a longer loan term, which might translate to lower monthly payments. However, the amount of monthly savings will be largely dependent on the interest rates for the loan term and on the existing balance. So while a shorter loan term will mean lower monthly payments, a shorter loan term will mean higher monthly payments, unless there is some kind of economic development in the country that causing home prices to appreciate.