Cash-out refinancing occurs when taking out a mortgage with a larger principal than the one you currently have. The result is that you get cash in the process. This is cash that you can then use for any purpose you find necessary.
A cash-out refinancing turns some of your home equity into cash. For most people, their home is their biggest asset. If in need of money, it can be a good source of funds. There are a couple of different options to access these funds. One option is to refinance and get a new mortgage with a larger principal than you currently owe. You get the difference in a lump sum and then repay it through your monthly mortgage payment. You can usually get a good interest rate with this mortgage.
Another option is to get a second mortgage through a home equity loan or a home equity line of credit. A home equity loan is similar to a first mortgage in that you receive a lump sum and the interest and principal payments combine to pay off the loan within a specific number of years. Home equity loans are usually for a 15 year term and usually carry a higher interest than a first mortgage.
With the home equity line of credit, you access the money as needed through a credit card, checkbook, or debit card tied to that loan. HELOCs have adjustable interest rates and you pay interest only on the amount you withdraw instead of the entire credit limit. The line of credit is typically for 10 or 20 years but then after that there is a fixed period to pay off the remainder of the loan and interest.
Cash-out refinancing happens so people can get money for all sorts of reasons. For example, it can be to pay off a major expense, such as college, with a better interest rate. The interest rate that you can get on a mortgage is usually lower than the interest rate that you can get on other types of loans. A cash-out refinance can also be used to consolidate debt. Credit cards often carry exorbitant interest rates. Instead of paying these high rates, you can consolidate your credit card debt into your mortgage for a much better interest rate. Don’t do this unless you are able to curtail your spending, though.
Cash-out refinancing can also be used to combine first and second mortgages. This can usually get you a better rate and also make things a bit simpler. Instead of paying two mortgage companies at two rates, you only have one payment with one rate.
If you choose a cash-out refinance, you can use the money for a variety of purposes. Consider carefully if this can improve your financial situation before proceeding.
