Definition of "Cash-Out Refi"
Refinancing for an amount in excess of the balance on the old loan plus settlement costs. When the main objective of a refinancing is to raise cash, the relevant question is whether the cost of raising cash in this way is higher or lower than raising the same amount of cash with a second mortgage. A cash-out refi with an interest rate below the existing rate is likely to be less costly than a second mortgage. If the cash-out reh' rate is higher than the existing rate, the second mortgage is likely to be cheaper, even though the second mortgage rate may be well above the cash-out refi rate. The reason is that the second mortgage allows the borrower to retain the lower rate on the existing mortgage. Because the APR on a cash-out refi ignores the loss of the existing first mortgage, comparing it with the APR on a second mortgage is meaningless.
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