What is a Cash Out Re-Finance? Helpful Things to Bear in Mind

Posted on July 25, 2009
Filed Under Refinance | Leave a Comment

A cash out re-finance essentially enables the homeowner to re-finance their home for the amount greater than the balance of the existing mortgage. The homeowners than repay the existing balance as well as 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 homeowners can utilize this check for any target they want 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 offered when there is existing equity in the home. This is vital because the lender is able to justify the practice of offering increased funds to the homeowner due to the worth of the property. This is because the lender feels as though the security of having the home for collateral does not put them at a high risk for the homeowner defaulting on the loan.

Homeowners who wish to take advantage of a cash out re-finance offered by a lender should inquire as to whether or not the lender offers this type of re-financing. This is principal because not all lenders offer this option. It should in point of fact be one of the primary questions the homeowner asks when inquiring about re-financing programs. Doing so will save homeowners, who are looking for a cash out re-finance, a great deal of time.

How Can the Cash be Used?

For lots of homeowners the most appealing aspect of cash out re-financing is that the additional funds can be used for any reason desired by the homeowner. The homeowner does not even have to offer the lender the explanation of how the added funds will be used. This is vital because when the lender writes the check for the additional funds, he has no concern for how the cash is used. This is because the quantity of the added funds is rolled into the re-financed mortgage. The lender only focuses on the homeowner’s ability to repay the mortgage and is not concerned with how the homeowner uses the money which are released in the cash out.

While the principle of a cash out re-finance does not have to be disclosed to the lender, the homeowner would be wise to use these funds in a judicious manner. This is because the homeowner will be responsible for repaying these funds to the lender. Some of the common uses for funds collected from cash out re-financing include:

* Undertaking home improvement projects
* Purchasing items for the home
* Taking a dream vacation
* Putting cash in a child’s tuition fund or
* Purchasing a vehicle
* Starting a small business

All of the reasons listed above are outstanding uses of a cash out re-finance option. Homeowners who are considering this sort of a re-financing option should additionally take into account whether or not the deductions are tax deductible. Using the cash out opportunity to make home improvements is just one example of a circumstances where the funds can be tax deductible. Homeowners should check with their tax attorney on the matter to determine whether or not they are able to deduct the interest from the repayment of their re-financing loan.

Cash Out Re-Financing Example

The process of a cash out refinancing option is rather easy to illustrate with a plain example. Think about a homeowner who purchases a $150,000 with a 7% interest. Now think about the homeowner has already repaid $50000 of the loan and would like to borrow an additional $20,000 to make a rather huge purchase or invest in a small business. With this extra funding available the homeowners have the opportunity to use the equity in their home to make their dreams come true. In the example above the homeowner may refinance for a total of $120,000 at a lower interest rate such as 6.25%. This process let the homeowner to take advantage of the existing equity in their home and additionally allows the homeowner to qualify for a substantial loan at a rate typically reserved for re-financing or home loans.

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