With a cash-out mortgage, you can refinance your loan and take some of your equity as cash. Before deciding how much cash to use, you should know how PMI and equity amounts will affect your decision. But you might find that the benefits of refinancing are worth more than the costs.
How Cash-Out Mortgages Work
With a cash-out mortgage, you can refinance to get a lower interest rate or to get some of your home's equity. When the process of refinancing is done, you will get a check. In some cases, you can decide to take up to 90% of the value of your home. But taking out a big chunk of your home's value in cash will affect your refinancing rate and might mean you have to carry private mortgage insurance (PMI).
How Much PMI Costs
Just like with a regular mortgage, if you borrow more than 80% of the home's value, you will have to pay PMI. PMI protects the lender, since mortgage loans have a higher chance of not being paid back. You'll have to pay premiums when the loan closes and each time you pay your mortgage. PMI can easily cost hundreds of dollars a year.
You can also drop PMI once your principal is paid off or your home's value goes up so that your equity is more than 20%. If your home goes up in value, you will have to pay for an appraiser to look at it. You will also have to ask the mortgage lender in writing to drop PMI.
Costs go up
You may also have to pay higher interest rates, at least 0.25% more, if you take out more than 75% of the value of your home. Rates are higher because there is a higher risk for the lender. The type of financial package you can get will also depend on your credit history.
Pros and Cons of Cashing Out
A cash-out mortgage does have costs, but you should also keep in mind the benefits. You can deduct the interest from your taxes, and the rates are lower than with other kinds of credit. You can also spread out your payments over a longer time, which will make it easier on your budget each month.
Taking out more than 75% of the equity in your home is not always a bad idea. You just need to figure out how much it will cost you. You might find that, in the long run, using the equity in your home is a better way to get credit than the other options you have. You might also find that the tax advantages make up for the slightly higher costs.
