No cash-out versus cash-out refinancing

No cash-out refinancing occurs when the amount of your new loan doesn't exceed your current mortgage debt (plus points and closing costs). With this type of refinancing, you can typically borrow up to 95 percent of your home's appraised value.

A cash-out refinancing occurs when you borrow more than you owe on your existing mortgage. In this case, you are often limited to borrowing no more than 75 to 80 percent of the appraised value of your property. Any excess proceeds remaining after you've paid off an existing mortgage can be used in any way you see fit, but the best use might be to pay off other outstanding high-interest debt, such as credit card debt.

Cash-out refinancing has certain advantages. The interest rate that you'll pay on the mortgage proceeds will usually be less than the interest rate on the other debts (e.g., car loans, personal loans, credit cards, and even some student loans). Moreover, the interest paid on your refinanced mortgage is generally tax deductible, whereas the interest on consumer debt is not.

There are disadvantages to this approach, too. Your refinanced mortgage is secured by a lien on your home. If you can't make the mortgage payments, the lender can foreclose on your home and sell it to pay the mortgage. Credit card or automobile lenders can't take your house away in this fashion. Moreover, unless you're well disciplined, you could pay off the high-interest (credit card) debt only to run it up again, further damaging your financial position.

If you're going to explore a cash-out refinancing, do it only if all of the following are true:

• Your savings make the refinancing worthwhile, even if it wouldn't give you the chance to repay other debt
• Your savings are "real," due to a lower interest rate or a shorter loan term, and not due solely to tax factors, since tax laws may change
• You're sure that you can afford the new monthly mortgage payment
• You trust yourself (and your spouse) not to run up the repaid debt again

Even if the rate on a new mortgage would be only slightly lower that what you've got now, refinancing is a good idea if your savings will outweigh the costs of refinancing during the time you own the home. If you're unsure how much longer you might live in a particular locale, use recouping your refinancing costs in five years or less as a good rule of thumb.

Home loan - mortgage refinancing : A wise action?

When your home-loan has reach around 5 to 10 years, you might be thinking to re-finance your home mortgage to get the extra money for let say, home renovation, or other property investment, or home decoration, mutual trust or even play with stock market. Another benefit is that If you obtain a lower interest rate on your new loan than you had on your old one, you'll be saving money.

The question is that when is the most suitable time to refinance your mortgage? Generally, there are two good times when it's wise to refinance your mortgage. If you've got an adjustable rate mortgage, one of those times is during periods of rising interest rates. If you refinance to a fixed rate mortgage, particularly to a rate similar to your present low adjustable rate, you'll avoid the higher costs when the adjustable rates start going up.

The other time it's a good idea to refinance is when you'll save money by getting a lower interest rate. In this case, you'll want to make sure that your monthly savings will pay back your refinancing costs while you're still living on the property. If you sell your home before your refinancing has paid for itself, you won't be saving anything.

If you are experiencing cash flow difficulties, you may be tempted to lower your monthly mortgage payments by refinancing to extend the term of the loan. From a savings perspective, this is not a good reason to refinance. Unless you get a lower interest rate on the new loan as part of the bargain, you're not really saving any money; in fact, the reverse will be true. If you extend the term of your mortgage without changing anything else, you might loosen your tight cash flow situation, but you'll actually pay more total interest on the mortgage in the long run.