Have you ever heard the phrase “using your house like a piggy bank” and wondered how exactly that works?
The answer: a cash out refinance. A cash out refinance lets you pocket some of the value of your home. You see some instant return on all those mortgage checks you’ve sent in. Here’s how it works.
Cash Out Refinancing: The Basics
Like any refinance, a cash out refinance is a new loan. You replace your existing mortgage with a new (and improved, we hope) refinance mortgage. With regular refinancing (also known as rate and term refinance), you get a new mortgage equal to the amount you still owe on your home. Your new mortgage could be designed to change the length of your mortgage term, or to change the interest rate you pay. But with cash out refinancing, you get a new mortgage for an amount that exceeds what you currently owe. Then, you cash out the difference.
People use cash out refinancing when they need a lump sum of money, say, to pay off high-interest credit card debt. Cash out refinances often come with longer mortgage terms, to keep borrowers from seeing a big jump in their monthly mortgage bill.
The Pros
The big, obvious advantage to a cash out refinance is that you get money from your home equity without having to sell the home. (more…)