Are Interest Rates Higher For A Cash Out Refinance?
When refinancing your home, you have several options. Among them is the opportunity to take cash out of your home’s value in what is called a cash out refinance. The way it works is, say your home is worth $200,000 and you currently owe $100,000. You are refinancing the $100,000 you still owe, but also would like to have $20,000 in cash. A lender may allow you to do a cash out refinance where you borrow the $20,000 against your home. Your new refinance amount would then be $120,000. You have your refinance and the cash you wanted. However, this type of refinance is generally at a higher interest rate than a straight refinance. Here’s why.
A cash out refinance increases the loan to value ratio that lenders review when approving a loan. It is somewhat riskier for a lender to approve a loan that is for 60% of a home’s value, versus a loan that is only for 50% of a home’s value. While these specific loan to value ratios are generally not very risky due to the amount of equity remaining, higher loan to value ratios of 80% or higher will usually incur much higher interest rates. This is due to the lender’s fear that a borrower may choose to “walk away” from the mortgage debt.
Usually Won’t Qualify For Government Programs
Various government programs exist to make home more affordable for first time buyers or refinancers. One thing they generally don’t allow is a cash out refinance. This results in many low interest programs being simply off the table for people looking to do a cash out refinance.
The Increase In Interest Rate Is Still Usually Better Than Any Other Type Of Loan
If you are considering pulling some equity out, you may have already shopped around and realize that a cash out refinance is one of the cheapest ways to obtain a loan. The difference in interest on a straight refinance and a cash out refinance may only be half a percent, and at current rates, still way below 6% overall. Your average credit card cash advance will be well over 10%. Lenders know this, and for the service, they get a slightly higher interest rate.
If you need the money, and have shopped around, your home may be your best source for extra cash. Just make sure that you don’t borrow to heavily to the point that you will be underwater if home values drop. Also, be certain that you can afford the monthly payments.
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