Cash Out Home Loan

The term cash out home loan can refer to a couple of different types of lending agreements that are available to homeowners that have equity in their place of residence. The name of the lending agreement accurately describes what takes place; an owner pulls cash out of the house, much like a child would with his piggybank. And just like a child whose sudden whim can be fulfilled with the upside shaking of the bank, an adult can shake the house for anything that the owner desires. Unwise uses of the cash out home loan could include a new car, a vacation, furniture or perhaps a wedding while wise uses might include a new bedroom, family room or a kitchen and/or bathroom addition or remodel or perhaps a medical procedure that is not covered by insurance that is crucial for sustaining life. These are judgments calls, but financial experts warn that often there is a heavy buyer's remorse for purchases made with a cash out home loan that depreciate or don't seem nearly so important years later.

A cash out home loan can mean a home equity lending agreement, which is really a second mortgage. A second mortgage means that in the event of a default or bankruptcy the holder of the second loan is subservient to the holder of the first mortgage. In other words, the primary mortgagor gets his money first, and anything left over will be given to the holder of the second mortgage. So the holder of the property equity lending agreement has a higher risk factor in loaning out money and the interest rate will be typically be somewhat higher than what the prime mortgage is. Lenders are quick to advertise that a home equity lending agreement can indeed be used for anything a homeowner wants, making them a tasty alternative to high priced credit cards. In fact, the home equity borrowing agreement is often called a home equity line of credit to be used with a debit card or checks just from that account. It is usually a variable rate lending agreement, and the monthly payments depend on how much equity is pulled out of the house from month to month.

Banks, credit unions, and lending companies all offer these second mortgage types of loans and all are based on property equity. How do they work? Banks and credit unions, the most conservative of all the lending entities, may only offer to lend a borrower fifty to seventy percent of the entire equity in a residential property. The cash out home loan coming in the form of a home equity lending agreement will have a cost for the privilege of borrowing money, usually but not necessarily in the form of points or a number of different fees. In either case, just like a first mortgage, the borrower has to pay upfront fees to secure the lending agreement. A borrower should not be surprised to have to pay two to four points (each point is equivalent to one percent of the loan) for the costs of getting the cash out home loan secured. These costs can often be rolled into the lending agreement, or can be paid from the cashing out process.

But a cash out home loan needn't just be a home equity loan of a second mortgage. The loan can also be an entire new first mortgage and this is how it works. A borrower buys a house for one hundred thousand dollars and lives in it for ten years making faithful monthly payments. During that time the value of the house raises to one hundred and twenty thousand and the mortgage principle has been reduced by ten thousand dollars. By most all accounts the equity in the house now stands at thirty thousand dollars. The owner of the house has decided that rather than get a home equity loan or second mortgage, she will instead apply for a new cash out home loan mortgage of one hundred and ten thousand dollars and pocket twenty thousand dollars from the equity in the house, thus "cashing out" with a new lending agreement. Of course, the new owner will have to pay all costs associated with the loan which in this case is the equivalent of four points for the one hundred and ten thousand dollar mortgage or four thousand four hundred dollars.

As with any loan application including these types of cash out loans, there comes into play the three issues about which the lenders are most concerned. First is a steady employment record. A person can have several jobs over a period of years, but was there a record of stability and how long has the borrower been at his present job? Secondly, a borrower must have a high enough credit score to warrant some trust on behalf of the lender. The average American has a credit score of six hundred and twenty, but banks often require a score of at least 640 to merit consideration. Lending companies may tolerate lower scores with higher interest rate loans.

Additionally, the debt to income ratio is of high interest to all lenders. This ratio is the percentage of all debt payments each month in relation to monthly income. It needs to be at forty percent or less to be fully qualified for any cash out lending agreement. "But God commendeth his love toward us that while we were yet sinners, Christ died for us." (Romans 5:8) Every person on the planet has a debt to God because of sin that cannot be repaid by good deeds or charitable acts. The result is that no one can enter heaven owing God this sin debt, but Jesus Christ paid that debt off completely when He was crucified and now because He lives all persons have eternal life if Jesus, who is God, is accepted as Lord and Savior of their lives.



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