You maybe haven’t heard of a cash-out refinance lately. Here’s why: cash-out refinancing assumes that you are in an upside down mortgage. In fact, it only works if you have solid equity in your home and your home hasn’t lost much, if any value.
The beauty of the cash out refinance
A cash-out refinance allows you to get extra cash without taking out a new loan, like in a home equity loan. Instead of putting up your home’s equity as collateral on a new loan, you refinance for a bigger mortgage and then use the extra cash at your discretion.
Here’s how it works: You owe $100,000 on your mortgage but you have $200,000 in equity. (Besides offering some incidental collateral in the case of unforeseen expenses, your equity is actually not really part of the equation.) You refinance your home for a lower interest rate and take out a $130,000 mortgage. You can do whatever you like with the extra $30,000.
Cash-out refinance a creative way to a quick economic boost
It’s a creative way to finance an addition to your house, a new car or pay for college. Since you have equity already, you can look at it as borrowing on that equity since you now have a larger mortgage, but without the costs of taking out a new loan.
More importantly, you managed to secure a ‘loan’ and get better financing conditions. If you managed to get a great interest rate, you could be looking at further discounting the $30,000 you borrowed.