What is a Cash Out Re-Finance?
If you are planning on refinancing your existing mortgage, and need some extra cash, a cash-out refinance could be an option. A cash-out refinance is a replacement of your first mortgage. It is is a loan in which the borrower takes additional cash above the amount of the existing liens.
A cash out re-finance basically enables the householder to re-finance their house for an amount greater than the balance of the exiting mortgage. The householders than refund the existing balance plus the additional amount over the course of the loan period and are given a check for the amount above and beyond the balance of the exiting mortgage. The householders may use this check for any purpose they choose now and repay the debt along with the rest of re-financed amount.
When is a Cash Out Re-Finance possible?
A cash out alternative is available when there’s existing equity in the house. This is important as the loaner is able to justify the practice of providing increased funds to the householder due to the value of the property. This is as the loaner feels as though the security of having the house for collateral doesn’t put them at a high risk for the householder defaulting on the loan.
Householders who wish to take advantage of a cash out re-finance offered by a loaner should inquire as to whether or not the loaner proposes this type of re-financing. This is important as not all loaners offer this alternative. It should actually be one of the first questions the householder asks when inquiring about re-financing programs. Doing so will save householders, who are seeking a cash out re-finance, a great deal of time.
How Can the Cash be Used?
For many householders the most appealing aspect of cash out re-financing is that the additional funds may be used for any purpose desired by the householder. The householder doesn’t even have to offer the loaner an explanation of how the additional funds will be used. This is important as once the loaner writes the check for the additional funds, he’s no concern for how the money is used. This is as the amount of the additional funds is rolled into the re-financed mortgage. The loaner simply focuses on the householders power to refund the mortgage and isn’t concerned with how the householder uses the funds which are released in the cash out.
While the aim of a cash out re-finance doesn’t have to be disclosed to the loaner, the householder would be wise to use these funds in a judicious manner. This is as the householder will be responsible for refunding these funds to the loaner. A few of the popular uses for funds collected from cash out re-financing include:
* Undertaking home improvement projects
* Purchasing items for the home
* Taking a dream vacation
* Putting money in a child’s tuition fund or
* Purchasing a vehicle
* Starting a small business
All of the reasons listed above are excellent uses of a cash out re-finance alternative. Householders who are considering this type of a re-financing alternative should also consider whether or not the deductions are tax deductible. Using the cash out alternative to make home improvements is jus one example of a situation where the funds may be tax deductible. Householders should consult their tax lawyer on the matter to determine whether or not they’re able to deduct the interest from the refund of their re-financing loan.
Cash Out Re-Financing Example
The process of a cash out refinancing alternative is fairly easy to illustrate with a simple example. Consider a householder who buys a $150,000 with a 7% interest. Now consider the householder has already refunded $50000 of the loan and want to borrow an additional $20,000 to make a rather large buy or invest in a small business. With this additional funding available the householders have the chance to use the equity in their house to make their dreams come true. In the example above the householder may refinance for a total of $120,000 at a lower rate of interest such as 6.25%. This process allow the householder to take advantage of the existing equity in their house and also allows the householder to qualify for a substantial loan at a rate typically reserved for re-financing or home loans.