Cash out mortgage refinancing is the process of taking out a new mortgage for a greater amount than you owe on your existing loan. The difference between your old mortgage and the new loan is the amount of cash you get back at closing. Cash out refinancing is an inexpensive way of borrowing against the equity in your home. Here are several tips to help you decide if mortgage refinancing with cash back is right for you.

Cash out mortgage refinancing has many advantages over other types of home equity loans. The main advantage is that you will only have one monthly payment to make once you’ve refinanced the mortgage. Because your home is secured by one loan instead of two, you will qualify for a lower interest rate than if you had taken out other types of home equity loans. You can use the money you get back for any reason; common reasons include home repairs and renovations, debt consolidation, and paying for your child’s college education.

Mortgage lenders typically allow you to borrow up to 100% of your homes value; however, if you borrow more than 80% the lender could require you to purchase Private Mortgage Insurance as a condition of loan approval. Private mortgage insurance can be expensive and could add hundreds of dollars to your monthly payment amount. Before agreeing to pay this insurance make sure you understand how it will affect your payment amount.

Mortgage refinancing is not without risk. When you refinance your mortgage you start the amortization schedule from the beginning and the majority of your monthly payment is applied to interest. Because mortgage loans are “front loaded” with interest payments, very little of your payment amount is applied to loan principle in the early months of the loan. Another risk of cash out refinancing is that if your borrow 100% of your equity and the value of your home drops in a declining housing market, you could end up owning more than your home is worth.

To learn more about your mortgage refinancing options including costly mistakes to avoid by registering for a free mortgage guidebook.