If you have been living in your house for a few years, chances are that you have built up some equity, or “ownership,” in your home. With this value in your home, it is possible to refinance (or refi) your house and do what is called a “cash out.” This can be a very helpful way to help you pay off some debts or get a little extra money in your pocket.
How it works
When you have paid some of your house off through mortgage payments, and when your home has appreciated in value, you have created a difference between how much you owe on your mortgage and how much the house is worth on the local real estate market. This difference is known as the equity. When you refi your house, you can usually borrow anywhere between 90% and 125% of the value of your home (although you should avoid borrowing more than your home is actually currently worth). What you borrow is used to pay off the original mortgage, and there is usually money left over. This is given to you either as cash, or directly used to pay off debts.
Using your “cash out” from your house refi
Your cash from your house refi can be used for a variety of things. Unless the lender has helped you stipulate a specific use for the money (such as home improvement or debt consolidation), you can use the cash out from your house refi for whatever you want. Here are some of the common things that people use their refi cash for:
· Taking a dream vacation or cruise
· Consolidating debt into a single, lower monthly payment
· Improving the property so it has greater value
· Paying for a wedding
· Covering the costs of a higher education
· Making a large investment with the likelihood of a high return
Watching out for pitfalls
When you refi your house for a cash out, make sure that you go about it carefully. Figure out how much you need, and try not to go over that. Borrowing too much can mean losing your home when it becomes too difficult to pay back. Also, watch out for lenders who try to convince you to borrow more than your home is worth. The assumption is that your home will increase in value to cover the extra, but borrowing more than your asset can cover is not good asset management. Finally, make sure you watch out for possible prepayment penalties for your old mortgage upon refinancing.