A cash-out mortgage allows you to refinance your mortgage and pull out part of your equity. Before deciding how much to cash to use, be aware of the impact of PMI and equity amounts. However, you may find the benefits of refinancing outweigh the costs.
Cash-Out Mortgage Basics
With a cash-out mortgage, you can refinance for lower rates or to just get part of your equity out. Once the refinancing process is completed, you will end up with a check. You can decide to take up to 90% of your home's equity in some cases. However, cashing-out a large percent of your home's value will impact your refinancing rate and might require you to carry private mortgage insurance (PMI).
The Cost Of PMI
Just like with a regular mortgage, you will be required to carry PMI if you take out more than 80% of the home's value. PMI protects the mortgage lender since there is a higher risk of default with such loans. You will pay premiums when the loan closes and with each month's mortgage payment. PMI can easily add up to hundreds a year.
You can also drop PMI once you build up your principal to 20% or the home appreciates so that your equity is over 20%. With home appreciation, you will have to pay for an appraiser's inspection. You will also have to make an official request to the mortgage lender to drop PMI.
You may also find yourself paying higher interest rates, at least a quarter percent, for cashing out over 75% of your home's value. Lenders charge higher rates because there is an increased risk level. Your credit history will also be a factor in the type of financial package you qualify for.
Benefits Of Cashing-Out
While there are costs associated with a cash-out mortgage, you should also remember the benefits. You can write off the interest on your taxes and you qualify for lower rates than with other types of credit. You can also spread out your payments over a longer period, lessening the monthly financial burden.
Taking out more than 75% of your home's equity is not necessarily a bad decision. You just need to weigh the financial costs. You may find that in the long-run, tapping into your home equity is better than the other types of credit available to you. You may also discover that the tax benefits offset the slightly higher costs.