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Cash-outs trade money for equity

ALLISON SIMSON
special to the daily

Question: We are interested in doing a “cash out” refinance on our home. Are there any risks involved with this type of refinancing?

Answer: Cash-outs involve refinancing an existing mortgage and trading in home equity for cash. This option is especially popular when interest rates are down, because it allows homeowners to refinance at lower rates while gaining access to extra cash. Even better, their monthly mortgage payment usually remains the same or even goes down.

The benefits of cashing out include stretching the term of the loan to access more money at a lower rate, the ability to replace high-cost debt, and avoiding the need to cash in taxable investments.

Cashing out does involve some risks – including possibly renewing a mortgage for its full life and incurring a higher total interest cost for financing and reducing home equity. It can be detrimental if housing prices decline; homeowners who have little equity in a declining market could find that they owe more on their property than what it is worth. Also, homeowners must manage their finances carefully, using the cash-out funds to handle expenses and then keeping spending under control. Qualifying for a cash-out is also difficult. Because this type of borrowing eats into equity, it raises the risks to lenders, who, in turn, will want to carefully scrutinize applicants.

An alternative to cash-outs is the home equity line of credit, which allows a consumer to borrow on a revolving basis. Homeowners need only pay interest on the amount borrowed and will not have to reapply and pay service charges to gain access to more money. This option is most appropriate for borrowers whose cash-out will not reduce their mortgage payment and also for homeowners who want an extra source of cash for ongoing projects, rather than for a specific purpose.

Question: We are shopping for a loan and would like to be able to compare different loan scenarios. We want to establish the true cost of the different loans that are available. Do you know of any site on the Internet where we could do this?

Answer: Fannie Mae has introduced the latest version of its true cost calculator, an online tool providing consumers with an easy way to weigh various mortgage options. The release of true cost calculator 2.0 features the ability to create a file and save multiple loan scenarios for comparison purposes without needing to re-key data.

The technology helps consumers calculate the costs of getting a mortgage, including interest rate and points, mortgage insurance premiums, appraisal and title insurance fees, and other settlement charges. The True Cost Calculator at http://www.HomePath.com also provides a more precise estimate by factoring in how long the consumer actually plans to keep the loan. The tool provides an analysis using four key measures: the true cost rate, which is the true cost of the mortgage, expressed as an annual percentage; the true cost rate after taking into account the borrower’s potential tax savings; the monthly mortgage payments; and the estimated equity the borrower can expect to amass during the anticipated loan term.

Allison Simson can be reached at (970) 468-6800 or at Info@SummitRealEstate.com. Summit Real Estate – The Simson/Nenninger Team is located at the Dillon Ridge Marketplace. Want to know the value of your Summit County property? Visit http://www.SummitHomeValue.com


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