Cash out refinance literally means that you are taking cash out of the equity of your home to pay off other debts, make new purchases, education, or investments, etc. Cash out refinance may not be a good option for everyone; however, it is a viable option when you need a chunk of money quickly.
How it Works
Cash out refinance works when you refinance your home after equity has been built, and the new mortgage loan you’ve taken out is larger than your remaining loan balance. If you own a home that is worth 150,000 for instance, but you only still owe 130,000 it means that you have 20,000 worth of equity in the home, or quite literally, you own 20,000 dollars worth of the home. To perform cash out refinance, you would refinance the home for the same loan amount of 150,000 and the 20,000 equity would be given to you. This could make you subject to higher interest rates; however the cash in hand is sometimes worth it, especially if you plan to use it towards an investment or to send a child to college.
Cash out refinance is a good way for folks who haven’t been paying on their mortgage very long to access the equity of their home and apply it to other things. Cash out refinance is still refinancing. You will have to pay closing costs, fees, and possibly a higher interest rate depending on the current market rates. It is important to determine whether or not these additional costs and increases are worth the risks involved.
Home Equity Loans versus Cash Out Refinance
Since cash out refinance may not be the best option for everyone, there is also the option of taking a home equity loan, also known as a second mortgage. This is simply adding a new loan to your old loan; your monthly payments won’t change and instead of receiving a check you’ll be given a line of credit against the equity of the home. This can help you consolidate debt without raising your interest rates. This is an option for anyone that has been paying on their home for longer than ten years, and who doesn’t want to lengthen the term of their original mortgage loan.
If you’ve been paying on the home less than five years, and you can expect lower interest rates than at the time of your original closing date, then cash out refinance may be the better option for you. All refinancing options depend heavily on timing to be effective, and so you will want to take into account your current mortgage term before you make a decision to go either way.
By Rachel West