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Cash-out refinances on the rise
Could it be time to cash out some home equity by refinancing your mortgage? For growing numbers of owners, the answer this year is an emphatic yes, at least according to new data from some major lenders.
In a cash-out refinancing, you convert part of your home equity into money, adding to your mortgage balance. Say you have a $400,000 home with a $200,000 first mortgage. You have $200,000 of equity and a couple of worthwhile projects in mind — paying off high interest rate credit card balances and renovating the house — that will cost you around $50,000. Since mortgage rates remain attractive in the 4 percent range and you can handle the higher monthly payments on a larger balance loan, you refinance your $200,000 existing loan and take out a new $250,000 loan to replace it. You end up with more debt, but you also walk away with roughly the $50,000 you need, less transaction fees.
Cash-outs were the rage during the housing boom years of 2004-2007. At their peak, in the third quarter of 2006, nearly nine out of 10 owners who refinanced pulled out money from their homes, according to mortgage investor Freddie Mac. But by late 2008, the bubble had imploded. Equity holdings plunged. Cash-out refis virtually disappeared.
Now, with home equity higher in many markets — especially along the Pacific and Atlantic coasts — cash-outs are making a comeback.