A cash-out refinance changes your current home loan for a larger loan, allowing you to pocket the difference in cash. It can be a good way to take advantage of your house’s equity, but it is also important to remember that the money comes at a price. All the money “cashed-out” will need to be repaid in the same way as any mortgage so you will want to carefully evaluate the benefits of a cash-out refinance against the potential risk of having a larger loan and monthly payment.
A cash-out loan can be done by replacing the 1st mortgage with one larger loan or by placing a HELOC (Home Equity Line of Credit) on top of your existing loan. In the second scenario, you would have two loans, the first mortgage and the HELOC. The major difference between the two is that, generally, when you redo the first you elect to a fixed mortgage or at least an ARM (Adjustable Rate Mortgage) that is fixed for a term. When you pay the payment every month, both interest and principal are paid thus reducing the loan amount over time. With a HELOC, in general, you are ONLY paying interest. This situation has three distinct characteristics. For one, the principal never goes down unless you pay extra. Secondly, the interest rate is floating, meaning it may adjust every month depending on the market. Lastly, if you elect to pay extra every month, the payment will reduce and recalculate off of the current balance.
Colorado Lenders has several banks to compare while determining what cash-out mortgage is best for you. Contact us today to learn more! 303-578-9202