The cash out home refinance loan is something that is becoming more and more common all the time. Today many of us see the value in our homes and we are willing to capitalize on that, taking the equity straight to the bank. In fact, this is what a cash out refinance lets us do. When you go about this process you are refinancing your loan, so you are paying off one loan with another. The only difference is that you are taking out a new loan for more than is owed on the current loan and you pocket the difference.
The Cash Out Home Refinance Loan Explained
The way that this works is if you refinance your current loan that you owe $100,000 on but you refinance for more than is owed, for instance, $120,000, you would walk away from the transaction with the $20,000 to put in the bank or pay off bills or whatever you want to do with it. You don’t simply get the $20,000 for free; instead you have a mortgage for $120,000 again even though you originally had just $100,000 left on the original loan.
Many people confuse the cash out home refinance loan with a home equity loan but there are some key differences. First, the home equity loan is actually a separate loan from your mortgage but the cash out refinance is one in the same with your home loan. Because the cash out home refinance loan is part of the mortgage the interest rates are usually much lower than you would receive with a home equity loan. In addition, you pay closing costs when you refinance your mortgage but you do not with a home equity loan, and these closing costs can cost thousands of dollars depending on the value of your home and the specific loan and lender that you are working with.
You might be wondering why people would go for a cash out home refinance loan and there are many reasons. For a lot of people, there are bills or home improvements that they would like to take on that they cannot take on with the funds that are in their bank account, and this is one of the most affordable ways to get the money. At the same time, the borrower might be able to secure a lower interest rate on the loan, so while they owe more on the home than they did before, at least their interest rate is lower.
When you have a cash out home refinance loan you are able to take the money and do with it as you please. Many people pay off bills, pay for school, repair their home, update their home, or even buy a new vehicle. There is not a limit as to what you can do with the loan and many people like this fact. There are many benefits to this type of loan and you should consider those, but make sure you weigh them with the risks or pitfalls, too. Many people assume that they are getting the money that they need for free, but this isn’t the case. You are moving backward in paying off your mortgage because you will still owe the money that you borrow and do with as you please. Just keep this in mind because if you don’t absolutely need the money there may be better ways to go about it!