As I recently explained in detail in another article, a cash-out mortgage refinance loan can be a great way to free up some immediate cash using the equity you’ve built up in your home over the years. However, one of the downsides to a cash-out refinance is taking on a slightly higher interest rate than a regular refinance. It is a practice called “loan-level pricing.”
But as they say, there are exceptions to every rule. A cash-out refinance will not require a higher interest rate if the cash is used for one of the following situations:
- To pay off student loans
- To pay off a second mortgage used to buy the property
- To buy out an ex-spouse’s portion of the home during a divorce
Paying Off Student Loans
In the current economic environment, most student loans carry a much higher interest rate than mortgages. Also, student loans tend to have very rigid terms, while a mortgage refinance can provide more flexible terms.
By using a cash-out refinance loan to pull equity from your home, you can use the cash to pay off your student loans without raising the interest rate on the refi.
Consolidating a First and Second Mortgage
Some people avoid paying for private mortgage insurance (PMI) by using a second mortgage or a Home Equity Line of Credit (HELOC) to account for the remaining down payment, in order to bring them to 20 percent. In this instance, both the first and second mortgage were used to pay for the property.
As you build equity over time, you can use a cash-out refinance loan to pay off both mortgage loans and combine them into a single mortgage loan moving forward. This is another example showing that, when the cash-out refinance is used in a specific way, the interest rate stays the same as a regular refinance.
Keeping the House in a Divorce
If one person is awarded the house as part of a divorce settlement, that person needs to compensate the spouse moving out by purchasing their half of the home. A cash-out refinance of the existing mortgage loan can provide the homeowner with enough cash to buy out the other portion of the house. When this happens, your loan officer can give you the lower interest rate, similar to a regular refi.
With rates so low right now, more people can benefit from these exceptions in order to get the most out of their cash-out refinance opportunity.
Contact us at (608) 413-4270 for more information and to discuss your needs.