No cash-out versus cash-out refinancing

No cash-out refinancing occurs when the amount of your new loan is not higher than your current mortgage debt (including closing costs). Typically, you can borrow up to 95 percent of your home’s value.

A cash-out refinancing occurs when you borrow more than your current mortgage debt. In such a case, you can usually borrow no more than 80 percent of the appraised value of your home. Any extra money remaining after you’ve paid off an existing mortgage can be used in as you see fit.

Cash-out refinancing has some advantages, because the mortgage interest rate is usually lower than the interest rate on car loans, personal loans, or credit cards. In addition, the interest paid on your refinanced mortgage is tax deductible.

There are downsides as well. Your refinanced mortgage is secured against your home. If you don’t make the mortgage payments, the bank can foreclose on your home. Lenders such as credit card or automobile lenders can’t take your house away.

If the rate on a new mortgage would be lower that what you pay now, refinancing is a good idea.