If you've been paying on your home for a while and need money, you might think that a home equity loan is the way to go. In most cases, because you have two loans, you could end up paying more per month than if you did a cash out refinance on your property. This guide explains what a cash out refinance is and when to consider this option.
What a Cash Out Refinance Is
A cash out refinance is replacing your current mortgage with a new one. The only difference between a cash out and a regular refinance is that you'll get the equity you have in your home, in cash. For example, if you owe $100,000 and the value of your home is $150,000 then you have $50,000 in equity available to borrow.
If you need $20,000 then refinancing your mortgage for $120,000 is the way to go. The extra money goes in your pocket as cash to spend any way you wish.
Keep in mind that obtaining a cash out refinance usually means that you'll be paying for your mortgage longer, unless you request a shorter term. At that point, your monthly payment could be higher.
Be prepared to pay closing costs on a cash out refinance. Additionally, the lender may require that you have the home inspected and appraised to make sure that all is well and that the stated equity is the true equity.
When to Get a Cash Out Refinance
Use the cash you take from the equity in your home for anything you wish. However, do keep in mind whether what you're purchasing is worth paying a higher mortgage payment, or a longer term. Some things that are often good reasons to seek a cash out refinance include:
- home renovations
- children's college education
- medical expenses not covered by insurance
Other large expenditures only seem as if they are a good idea at the time of a cash out refinance. But because the value is only short term, you might regret the fact that you'll still be paying for them for the duration of the mortgage. For example, cashing out the equity in your home to pay credit card debt or to pay for a car could end up costing you more in the end because of the longer term. Other things that you might regret using the equity for your home to pay for include:
- dream vacation
Look at the equity in your home as a safe haven for retirement when you can sell your home and pay cash for something smaller. But if you need to refinance for any reason at all before that time, contact a company like Liberty Escrow Inc. They can help you find the right deal.