Cash-out Refinance is what homeowners do when they want to turn some of the equity they’ve built on their home into cash. Refinancing means you refinance on an already existing mortgage and in cash-out refinance, you get the difference amount in cash. For example, if you have a $500,000 house and you still owe the bank $200,000, you have built $300,000 in equity. If you wish you can request an amount in cash, perhaps $50,000, and this amount would be added to the pending loan amount. Hence, you will now have to pay $350,000 to the bank. So while you get some cash in hand, you will have increased mortgage amount and this has to be paid back. But many homeowners choose this option when they need some quick cash. It could be for a number of reasons, so getting a cash-out refinance is pretty common:
- To buy another property
- To pay for their children’s tuition fees
- To go on a vacation
- To pay off auto loans or credit loans (which are probably higher)
- To make other investments
- Home improvement
- You need quick cash for other investments
If you feel that you are paying a hefty amount as interest for your credit card every month, you can use this amount from cash-out refinance and pay it off. The interest rate for mortgage would be much lower than the credit card interest rate. You just have to make sure that no mortgage payments are missed.
Some people need money to renovate their homes in order to increase the value of their property. When they need significant cash, they opt to go for cash-out refinance. Doing home improvements can increase the equity of their home and lower their loan-to-value ratio.
Exploring other options
If you are not taking the refinance option, you have other options as well. You could go for the Home Equity Loan (HEL) or Home Equity Line of Credit (HELOC). The difference these two options have from cash out refinance is that they are separate from your existing loan. You will have to keep your home as collateral for getting a line of credit for HEL; this works somewhat like a credit card.
The Bottom Line
Cash-out refinance option would be a good one for people who can pay their mortgage on time. It is also a good option as can you get a lower interest rate; and, you can use this cash for other important things. In some ways, you do save money when you take this option. This would be helpful if you need some quick cash in hand.