What Is a Cash-Out Refinance?
Homeowners do cash-out refinances so they can turn some of the equity they’ve built up in their home into cash. A cash-out refinance is refinancing an existing mortgage, but the new mortgage loan is for a larger amount than the amount still owed, and you get the difference.
Here’s an example. Let’s say you own a $500,000 house and still owe $300,000 on the current mortgage. You’ve built up $200,000 in equity. Now let’s say you want an extra $50,000. You could do a cash-out refinance to get this money. If you did this, you’d get a new loan worth a total of $350,000 (the $300,000 you still owe on your home, plus the $50,000 you’re going to take out in cash).
Why Take out Cash?
Hey, cash is good for anything, but typically, you can use the cash for paying down your credit card debt, taking a vacation, or home improvements. Make sure you have a good reason and a plan.
For instance, if you have high interest debt such as credit cards, it may make sense to use a cash-out refinance to pay off this debt. You may boost your credit score by paying down your maxed-out credit cards, and you can get a tax benefit because you can deduct mortgage interest on your taxes.
On the other hand, home improvements can increase your home’s value, so that may be a smart way to pay for the project.
Isn’t This a Home Equity Loan?
No. Home Equity Loans are not Cash-out Refinancing.
A home equity loan is a separate loan. A cash-out is just a refinance of the existing loan. Also, interest rates on cash-out refinancing can be lower than interest rates on home equity loans.
The Bottom Line
Just be smart. Don’t lose your house because you don’t repay the new mortgage loan amount.
Buyers get into trouble when they use their homes as a piggy bank. However, when refinancing your loan, it may be a great time to think about taking some cash out.
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