What Is a Cash Out Refinance Loan?

by Susan Paige
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For most Americans, their home is the most valuable piece of property they own.  Many people have hundreds of thousands of dollars tied up in their home.  Of course, accessing that money isn’t as simple as withdrawing it from a bank account.  In order to actually use the equity in a property, it’s necessary to go through a process called cash-out refinancing.

Cash-out refinancing is essentially the process of taking out a loan that is guaranteed by the value of a piece of property.  For borrowers who own their home without a mortgage, a cash-out refinancing becomes a new mortgage.  Borrowers who already have a mortgage on their property may be able to replace the mortgage they already have.

Cash-out refinancing allows a borrower to get money from the stored equity in their home without the hassle of taking out an additional mortgage.  The entire value of the home is underwritten, essentially replacing the borrower’s existing mortgage with a new one.  In many cases, this has benefits to the consumer beyond simply being able to access cash.  Cash-out refinancing can also offer a borrower better payment terms than his or her original mortgage.

 Fewer Fees

Many Americans have mortgages that they took out years ago in the middle of trying to purchase a home.  In many cases, these loans are not the best financial choice, but they were usually recommended by a realtor or other real estate professional with a vested interest in getting the borrower into a home. This usually means that the borrower is paying a lot of money in fees and other costs that they can eliminate with a little bit of shopping around for a better loan.

In some cases, fees can be eliminated simply based on the amount of equity in a home.  Borrowers who were told that they have to pay PMI are often surprised to learn that their home has enough equity to eliminate this fee.  Similarly, borrowers who were forced to pay monthly financing fees or who have to pay for credit life insurance can save hundreds of dollars a month by finding a new loan that does not include these fees.

Lower Interest Rates

Mortgage interest rates have always been determined by several factors in the overall economy, but they are mostly influenced by the Federal Reserve rate.  As this rate has reached historically low levels in recent years, mortgage rates have also dropped.  For people who purchase a home and accompanying mortgage several years ago, this means that there is the potential to knock multiple points off their interest rate.  Even people who have purchased a home relatively recently are often surprised to see how much interest rates have dropped.

If a borrower has seen their credit score increase since their property was purchased, it may also be possible to qualify for a better interest rate.  Even if their credit score is similar to where it was when they purchased a home, simply eliminating debt can improve the debt to income ratio of a borrower and allow them to qualify for better rates.

A Good Way to Access Funds

Most consumers have a variety of other types of debt, including credit cards and auto loans.  By refinancing with a cash-out mortgage, they are able to pay off these debts and replace multiple loans with a single loan at a lower interest rate than what they are currently paying.  Because home loans are secured loans, they tend to come with some of the lowest interest rates available on the market today.  For landlords, cash-out refinancing a rental property can be a great way to invest in more properties or make needed repairs to existing holdings.

For other consumers, cash-out refinancing is a good way to pay for a large home repair or a college education.  Again, the interest rates offered by a mortgage will be much lower than the rates offered by banks who specialize in home improvement or student loans.  Many people have also discovered that the terms and conditions on these loans are much more agreeable as well.  Rather than be bogged down by student loans that have variable interest rates, for example, a consumer who uses their home equity to pay for college knows that their interest rate and payment will not change over the life of the loan.

Cash-out refinancing is an incredibly useful financial tool that can help an individual or family achieve their goals.  Whether you’re looking to take cash out to upgrade your home or if you’re just looking for some extra cash while lowering your monthly payment, it’s important to carefully research your loan options.

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