Cash Out Refinance – What is it?
Cash out refinances are essentially a tool for house-owners to refinance their homes for an amount of money higher than the remaining balance on the present mortgage. House-owners then have to repay the present balance along with the extra amount borrowed during the loan repayment period, and are provided with a check that covers the entire amount, over the current existing balance. House-owners can use this amount for any purpose they wish to and pay off the debt with the remaining refinanced loan.
What are the situations for cash out refinance?
Cash out options are available only if the home has equity present in it. This is of importance since lenders can then justify the option of providing a house-owner with funds higher than current balance with the existing property value. This happens since the lender then feels that the home, as collateral, offers a security that does not increase their risk for having a house-owner default on the loan.
House-owners planning to gain advantages from a cash out refinance being offered by any lender should first find out if the lender actually offers such an option. It is imperative to do this, since all lenders do not provide such options. This should ideally be among the first queries that a house-owner presents to the lender while researching refinancing options. This way, house-owners can save time in finding out a cash out refinance.
Refinance With Cash Out - What are the uses for the cash?
For several house-owners, the greatest attraction of such cash out refinances is the extra money that they can put to any use they feel like putting it to. House-owners are not expected to even provide any explanation of the use of the additional money thus received. This is significant, because after receiving the check for the additional funds from the lender, the lender no longer has any concern with the uses of the money.
The additional funds are simply rolled into the mortgage that was refinanced. The lender’s only concern is the house-owner’s ability to pay off the mortgage within time and not the ways in which the house-owners uses the funds that he received through the cash out.
Although a lender does not need to be told the purpose of the use of the additional funds from a cash out refinance, house-owners should exercise caution and use these funds wisely. The reason for this is that house-owner will have the responsibility of repaying the money to the lender ultimately. Some of the common uses for additional funds collected through cash out refinancing are:
- Home improvement and renovation projects
- Purchase of items for the house
- Undertaking of a dream vacations
- Educational pursuits or tuition funds
- Purchase of a new vehicle
- Investment of capital in a small business
Each of the above-listed reasons are god uses for cash out refinance funds. House-owners who plan to secure such a refinancing option should also think about the tax deductibility of such deductions. Making use of a cash out option for making house improvements is one of the ways in which such funds can be made tax deductible. House-owners may also find t prudent to speak to tax experts to find out if they are in a position to have the interest on the repayment for such refinances deduced from their tax payments.
Example of cash out refinancing & Cash-Out Refinance Rates Comparison
A simple example is more than enough to illustrate the cash out refinancing process. Take this case – a house-owner who secures a loan of $150,000 at a 7% interest rate. The next situation is when this house-owner has paid off $50,000 of the loan and now wishes to borrow another $20,000 for additional purchases or as capital or a small business.
Because of the availability of funds through the equity present in the house, house-owners have the chance to realize their dreams. In the above-mentioned example, the house-owner can refinance for up to $120,000 at interest rates as low as 6.25%. with this process, house-owner can gain benefits from existing equity in the house, and also find themselves eligible for big loans at interest rates that are generally applicable only to traditional refinances.
Recommended resources:
When is cash-out refinancing a good option?
http://www.bankrate.com/brm/news/loan/20010824a.asp
Cash Out Refinance vs Home Equity
http://www.wellsfargo.com/mortgage/articles/evaluate_options