A cashout refinance is the process of taking out a new home loan that is larger than your existing mortgage. You receive the difference in cash. The new cash can go toward any sort of financial need, from debt consolidation to funding home improvements. To use a cash-out refinance, you do need to have a certain amount of equity built up in your home.
Ordinary refinancing is different from a cash-out refinance because it simply replaces one mortgage with another loan for the same amount.
* It pays you the difference between the value of your home and the balance of your mortgage.
* It features a slightly higher interest rate due to the larger balance.
* It features a cap on the amount of equity you can extract in cash – typically 80 to 90 percent.
That last point means that you can’t quite convert all of your home’s equity cash. Here is what the process looks like with some numbers: If the value of your home is $200,000 and the balance on your mortgage is $100,000, that means you have $100,000 in equity. Say you have a renovation project in mind that will cost $50,000. If you use a cash-out refinance for $150,000, you’ll receive $50,000 in cash when the deal is done.
It’s well worth considering a cash out refinance if you have a good use in mind for the windfall and you can secure a favorable interest rate. Make sure you put the money toward purposes that will strengthen your financial standing rather than weaken it. This is a good source of funds for debt consolidation or home improvements, not buying a new car or taking a vacation.
Above all else, keep in mind that your house is your collateral in a cash-out refinance. Make your payments promptly to keep your home safe!
Prodigy Lending is a DBA of AmCap Mortgage, Ltd. (NMLS ID# 129122 – www.nmlsconsumeraccess.org/EntityDetails.aspx/COMPANY/129122), an Equal Housing Lender.
Managing RMLO: Jason Turner (NMLS #286357)