Cash-Out Refinance loans happen to have a higher default rate than other types of home equity loans. This higher default rate allows banks to charge higher interest rates on a cash-out refinance.

A cash out refi loan is a new mortgage on your home greater than the unpaid principal (example – 75,000 owed on home plus 25,000 cash to homeowner = new mortgage of 100,000). This allows homeowners to use the equity they have accumulated in their homes. It differs from a home equity line of credit “HELOC” and a second mortgage which are in addition to the primary mortgage. All are means of getting cash out of the “piggy bank” (your home’s equity).

Remember, these loans reduce or may even eliminate the equity that you have built up in your home. Equity is the cash you would have if you sold your house and paid off your mortgage loans. If you are unable to make payments, you could lose your home.

If the home involved is your principal dwelling, the Truth in Lending Act gives you 3 days from the day the account was opened to cancel. This right allows you to change your mind for any reason. You simply inform the lender in writing within the 3-day period. The lender must then cancel its security interest in your home and return all fees–including any application and appraisal fees – paid to open the account.

Compare rates from at least four lending institutions. They will compete for your business, so, ask them to match or beat the best offer.

Financial contracts can be very confusing. Before signing yourself to a major long term commitment have an attorney, familiar with cash-out refinancing and taxes, examine and explain the details (where the Devil is). A good tax finance attorney can save you many times his fee over the years, not to mention possible legal problems.

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