When you refinance your home with a cash out refinance mortgage you are borrowing more than the balance currently due on your loan. As an example, if you owe $60,000 on your home and the house is worth $100,000, then you have $40,000 in equity in your home. You can refinance your home for $100,000 and pocket the $40,000 difference.
Homeowners do this for a variety of reasons. These reasons include home improvements, paying off bills, and college tuition. You can use cash out mortgage refinancing to access large amounts of equity in your home. There are several things you need to know before doing so.
First, You Will Pay Closing Costs
Whenever you refinance a loan you will pay closing costs. The amounts you pay vary from one lender to the next; however, plan on paying several hundred to a thousand dollars at closing. If you are not able to do this you might consider taking out a home equity loan; home equity loans typically do not charge closing costs.
Second, The New Interest Rate Must Be Lower
If the interest rate you settle on when refinancing is not lower than your present mortgage loan, it will cost you a lot of money over the term of the mortgage. This will negate any potential savings you could realize by refinancing.
Lastly, Put Your Money To Good Use
The equity you cash out form your home is your money; however, you are borrowing from the lender to access that money. Since you will be repaying this loan for 15 or 30 years you should put it to good use.