Dear Dr. Don,
I am told that a refinance with cash out comes with a higher interest rate than a refinance with no cash out. Is this true?
— Rick Refi
A cash-out refinancing typically does carry a slightly higher interest rate than a straight refinancing. That’s because the lender takes on more risk with a cash-out refinancing, for no other reason than it is more money. I can’t quantify it for you, but a lender should be able to tell you the difference when you shop for a loan.
It’s also a different risk profile for the lender if the loan goes over 80 percent loan-to-value. The lender wants you to have an equity stake in the home. If there’s low equity, or no equity, remaining in the home after a cash-out refinancing, you will likely get a higher rate and you may have to pay private mortgage insurance.
Freddie Mac defines a cash-out refinance as one where the new mortgage is more than 105 percent of the old mortgage balance. In the third quarter of 2008, fully 78 percent of Freddie Mac mortgages were cash-out refinances.
As a homeowner, you have to make the decision whether you’re willing to pay a higher interest rate for the privilege of taking out the additional cash. For many homeowners, the interest differential is not enough to stop them from tapping their home’s equity.