When a Cash Out Refinance Can Help You Financially
In mortgage terms, a cash out refinance is when a homeowner refinances their loan for more than what is owed on it. Remember that the difference between what you owe on your home and what it is worth is called equity. In a cash out refinance, since you’re writing a new mortgage for more than what you owe on that original mortgage, the difference is returned to you in cash and is lowers that equity you have.
In other words, let’s say you have a home that is worth $200,000 and you owe $150,000 on your mortgage; your equity in the home is $50,000. In a cash out refinance, you would refinance not just that remaining $150,000 but an additional amount, let’s say $25,000 for the sake of this illustration.
You now have a mortgage for $175,000 on a home that is worth $200,000 so your equity is now just $25,000. But that additional amount you financed over and above your mortgage amount is released to you, just like any other home equity loan. So how can a cash out refinance help you financially?
While you’re lowering the equity in your home, it might make sense to do this depending upon what you do with that cash back. For example, if you use the money you get from a cash out refinance to pay down other debt that has a higher interest rate than your home mortgage, you’re saving yourself that much money in interest payments down the road.
Many people today have credit card debt totaling into the thousands with sky-high interest rates. Using the money you get from a cash out refinance to pay down that debt can mean saving that much more over the life of those cards or other loans.
For some, you can also consider using that money to make improvements to the home which will increase the value, often more than the money you put into it. This can mean building back up that equity rather quickly and easily simply by using that money you got from a cash out refinance.
Others have used those funds for things they need and would purchase anyway, such as college loans, major appliances, and so on. If you use the money you get from a cash out refinance for these purchases and expenses you can also save yourself that much money in potential interest charges than if you were to put them on your credit cards.
The money you get from a cash out refinance is of course yours to do with as you please. If you want to take an anniversary cruise or travel overseas, that’s your choice. You’ve built the equity in your home so it’s your decision as to how to enjoy it.
But consider your long-term financial goals and what that money can do for you overall. By using it wisely you can save yourself from additional debt and even make that money earn more equity for you.