Sign up for our FREE Monthly Email Newsletter
In addition to keeping in the financial know, you may be interested in checking your credit score and report.
¹The credit scores provided under the offers described here use the Equifax Credit Score, which is a proprietary credit model developed by Equifax. The Equifax Credit Score and 3-Bureau scores are each based on the Equifax Credit Score model, but calculated using the information in your Equifax, Experian and TransUnion credit files. The Equifax Credit Score is intended for your own educational use. It is also commercially available to third parties along with numerous other credit scores and models in the marketplace. Please keep in mind third parties are likely to use a different score when evaluating your creditworthiness. Also, third parties will take into consideration items other than your credit score or information found in your credit file, such as your income.
²The Automatic Fraud Alert feature is made available to consumers by Equifax Information Services LLC and fulfilled on its behalf by Equifax Consumer Services LLC.
³Equifax Credit Report Control™ is only available while you have a current subscription to Equifax Complete Premier. Locking your credit file with Equifax Credit Report Control will prevent access to your Equifax credit file by certain third parties, such as credit grantors or other companies and agencies. Credit Report Control will not prevent access to your credit file at any other credit reporting agency, and will not prevent access to your Equifax credit file by companies like Equifax Personal Solutions which provide you with access to your credit report or credit score or monitor your credit file; Federal, state and local government agencies; companies reviewing your application for employment; companies that have a current account or relationship with you, and collection agencies acting on behalf of those whom you owe; for fraud detection and prevention purposes; and companies that wish to make pre-approved offers of credit or insurance to you. To opt out of such pre-approved offers, visit www.optoutprescreen.com/.
4We will require you to provide your payment information when you sign up and we will immediately charge your card $4.95. After that, we will charge the card $19.95 for each month you continue your subscription. You may cancel at any time; however, we do not provide partial month refunds.
Equifax® is a registered trademark and Equifax Complete™ Premier is a trademark of Equifax, Inc. © 2014, Equifax Inc., Atlanta, Georgia. All rights reserved.
Refinancing your mortgage can be a good choice if you want to lower your interest rate or monthly payment, or if you need to tap into your equity in order to use the cash somewhere else.
If you want to reduce your mortgage principal, you can bring cash to the closing table in what’s called a cash-in refinance. If you prefer to tap into your equity, you may consider a cash-out refinance to get access to that money.
Before you decide on the course of action that is best for you, you need to understand the differences between a cash-in and cash-out refinance.
In a cash-in refinance, the homeowner puts in extra money at closing to pay down principal and boost the equity in the home, often in order to qualify for a refinance or avoid paying private mortgage insurance (PMI).
“A cash-in refinance is for people who have an existing loan-to-value ratio that is close to a notch point in pricing,” says Jack Guttentag, a professor emeritus at the Wharton School of Business who now runs an informational website called the Mortgage Professor.
For example, a homeowner who initially put down 20 percent may have less equity if the home’s assessed value has declined. Bringing cash to the closing in order to reach 20 percent equity could make it possible for that homeowner to qualify for the refinance or for a better interest rate.
Some who have the cash choose this type of refinance in part because of low interest rates on savings accounts and CDs. “If they didn’t feel like they had a better use for their money, they have the satisfaction of saying ‘Now I own more of my home,’” points out Rick Scott, an assistant professor of finance at Saint Leo University outside of Tampa, Fla. “Psychology is important in finance.”
Of course, many homeowners don’t have extra cash lying around for this purpose. According to data from Freddie Mac, 85 percent of those who refinanced during the second quarter of this year either maintained the same loan amount or lowered their principal balance by paying in additional money. Of those, only 2 percent reduced their principal balance.
Before a cash-in refinance, Scott suggests running the numbers to make sure you’re truly saving money. “Only do a cash-in refi if you could lower your interest rate enough to make up for the fees,” he says.
A cash-out refinance can be used to fund expenses such as home improvements, medical bills, or college tuition. Freddie Mac estimates that homeowners cashed out $9.5 billion in net home equity of conventional prime-credit home mortgages in the second quarter of this year. However, that number pales in comparison to the $84 billion in cash-out refinance volume during the second quarter of 2006, when cash-out refinances were more popular.
“Before the financial crisis, many people were refinancing as the value of their house went up and taking cash out to take vacations, buy a boat, or buy a nicer car,” Scott says. “But then the value of their house plunged and they were left underwater.”
According to Guttentag, cash-out refinances make up a larger portion of refinances overall when interest rates are high and a smaller portion when interest rates are low. That is because homeowners who don’t need to cash out equity are more motivated to refinance when rates are low.
Why refinance instead of taking out a home equity line of credit (HELOC)? Most HELOCs have an adjustable interest rate, so homeowners who want a fixed rate over 15, 25, or 30 years may prefer a cash-out refinance, according to Donald Frommeyer, president of the National Association of Mortgage Brokers. “You don’t have the expense that you might have in a HELOC,” he says.
Unsecured loans, such as a credit card or personal loan, typically charge higher interest rates than HELOCs or mortgages. “Say you wanted to take cash out to deal with some kind of emergency,” Scott says. “If it prevents you from borrowing at higher interest rates, a cash-out refinance might make sense.”
Still, it’s important to think through the repayment timeline and total interest before cashing out equity. “[Home-owners] have to understand and try to figure out exactly how much money they need and what the money is going be used for,” Frommeyer says. “You can’t just frivolously take out $20,000. You don’t want to put yourself in a bind where you’re going be financing that [money] over the entire term of the loan.”
Susan Johnston is a Boston-based freelancer who has covered personal finance for numerous publications including Bankrate.com, The Boston Globe, Learnvest.com, Mint.com, and USNews.com. Find out more at www.susan-johnston.com.
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.