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Understanding Cash back Mortgage Refinance Loans

Thursday, Apr 24, 2008

Learn how to raise the money you need by leveraging your home with a cash back mortgage refinance loan.

Generating extra money for your household doesn't have to involve eBay, pawnshops, or second jobs. Sometimes, it can be as easy as refinancing your mortgage.

A cash back mortgage refinance is a loan that pays off and replaces a smaller mortgage. Consider this scenario: You owe $250,000 on your first mortgage, and you replace it with a $300,000 loan. The new one is a cash back mortgage refinance, because it pays off your old loan and puts the remaining $50,000 in your pocket.

Just the facts

Cash back mortgage refinances are made on the strength of your home equity. As a reminder, your home equity is the difference between what your property is worth, and what you owe on your mortgage. Property value increases and mortgage balance decreases have a positive effect on the value of your home equity. Since these two things tend to happen naturally over time, you may already be eligible for a cash back refinance.

You can estimate the amount of money available to you with a few easy calculations.

  • Start with the value of your home. Get a free online market valuation to verify that your number is realistic.
  • Multiply your home's value by 80 percent, or 0.8, to estimate the cash back refinance mortgage amount. Lenders prefer to have a cushion between the amount of money loaned, and the value of the underlying collateral (your home). The 80 percent is just a guideline; you can borrow more than that, but you'd have to purchase private mortgage insurance (PMI) .
  • Subtract the estimated cash back refinance mortgage amount from the balance on your existing mortgage loan. The resulting amount is roughly the amount of cash available to you.

Use of additional funds

The lender generally won't ask why you need the money, so you can use these funds at your discretion. Conventional wisdom advises that you put the money towards something that will generate a return in the future, such as home remodels, necessary household purchases, or education-related expenses. You could also use the money to consolidate debt, as long as the rate on your cash back refinance is lower than the rate on your credit cards.

Other important considerations include the closing costs of the refinance, and the market interest rates. Closing costs will reduce your cash back funds slightly, so it's important to budget for them. Market interest rates, along with the loan amount, determine your monthly payment. Whether it's higher or lower than your existing one depends on how the prospective rate and loan amount compare to your original mortgage. (For more concrete information on how your payment might be affected, refer to MortgageLoan.com's Mortgage Payment Calculator.)

If you have a large and unavoidable expense looming, don't pull out the want ads just yet. Your home equity could be the ticket to the cash you need.

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