How Much does a Cash-Out Refinance Really Cost

Let’s consider a homeowner that purchased their home 5 years ago for $250,000 with a $200,000, 15 year mortgage at 4%.  Their property appreciated by about 3% per year and is now worth $290,000.  They have made 60 payments on their mortgage of $1,846, so the balance is now $146,118.

Interest rates are lower and they have some improvements they would like to make to the house, so they are considering refinancing their home.  Their bank gave them the following rates for 15 year mortgages:

• Refinance (no cash-out) = 3%
• Refinance with cash-out up to 75% loan-to-value (LTV) = 3.125%
• Refinance with cash-out up to 80% loan-to-value (LTV) = 3.250%

This should be considered 3 discrete loans.

Summary of Facts:

• Current Mortgage Balance = $146,118
• 75% LTV = $217,500
• 80% LTV = $232,000
• Loan 1 – refinance of current mortgage = $146,118 at 3%
• Loan 2 – cash-out up to 75% LTV = $217,00-$146,118=$71,382 at 3.125%
• Loan 3 – cash-out up to 80% LTV = $232,000-$217,500=$14,500 at 3.25%

Loan 1

• Balance = $146,118
• Payment = $1,009.06
• Interest Rate = 3%

Loan 2

• Balance = $217,500-$146,118=$71,382
• Monthly Payment = $1,515.13-$1,009.06=$506.07
• Interest Rate = 3.384%

Loan 3

• Balance = $232,000-$217,000=$14,500
• Monthly Payment = $1,630.19-$1,515.13=$115.06
• Interest Rate = 5.052%

Upon review, we see the interest rate on cash out from the property up to $71,382 is 3.384%, whereas the next $14,500 carries an effective interest rate of 5.052%.