For home-owners wishing to release some of the equity from their homes, cash out refinance has become an increasingly popular alternative to home equity loans.
But what exactly is cash out refinancing?
The term "Cash out refinancing" refers to a transaction in which a new mortgage amount is borrowed that is greater than the existing mortgage amount. Enabling you to pay of your existing mortgage and "cash out" the leftover amount.
For example, if you owe $100,000 on a home currently valued at $240,000, then you have $140,000 in equity. Provided your new mortgage loan is larger than $100,000, you can use the refinance loan to pay off what's left of your original mortgage and pocket the difference.
Why release equity?
Many people use this released equity to pay off consumer debts such as credit cards, store cards or personal loans. This certainly has its advantages. Paying off these debts using your mortgage can significantly reduce the monthly interest rate from 20% (or higher) to as low 5 to 9%.
Home improvements
Another popular reason that many opt for cash out refinance loans is to make improvements to their home. Choosing to invest some of the released equity back into your property is a very wise decision. Carrying out major home improvements increases your homes value and lowers the loan to value ratio. This is a great way to regain some of the equity that has already been released.
Future investments
For some home-owners a cash out remortgage can be beneficial for investment purposes. If you can invest your money elsewhere at a better rate of return than the interest rate charged on the remortgage, then this can be a worthwhile route.
Remember, like all other types of loan, refinancing a mortgage has its costs and you may be charged a higher rate of interest by your lender. Before taking on a cash out remortgage, obtain some mortgage quotes and make a risk-based assessment (taking into account all hidden costs) to work out whether extracting equity from your home is economical for you.
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