Cash out mortgage refinancing is the process of borrowing more than you owe on your existing loan and keeping the difference. For many homeowners cash out refinancing is an affordable alternative to a second mortgage or a home equity line of credit.
Suppose for example you owe $100,000 on a $200,000 mortgage and want $25,000 to make repairs to your home. You could refinance your mortgage for $125,000 and the remaining $25,000 will be paid to you at closing. You can use this money for any reason; many homeowners use the money to make repairs, pay for a child’s education, or even consolidate bills. The advantage of cash out mortgage refinancing is that you will qualify for a lower interest rate because your home is secured by only one loan.
When you borrow against your equity using a second mortgage or home equity line of credit your home is secured by multiple loans which represent a greater risk for the lender. The greater risk you pose, the higher your mortgage rate will be and the more expensive your loan becomes.
Keep in mind that cash out refinancing borrows against your equity by replacing your first mortgage. Home equity lines of credit and second mortgages are an additional loan secured by your home just like your mortgage. If you fall behind on the payments for your home equity loan you could lose your home just as quickly as if you fell behind on your mortgage payments.