What is Cash Out Refinancing?

If you’ve been paying off on your home for a long time and you’re in a pinch with your mortgage or another bill, you might be able to use cash out refinancing in order to handle the problem.

Cash out refinancing isn’t available to everyone in all situations, but sometimes it can come to your rescue.  With cash out refinancing, the money which you’ve put into your home can be liquidated and returned to you in the form of a loan, which you can then use to pay for other things unrelated to your home.

As an example, let’s say that your home is valued at $200,000.  Perhaps you have been paying off on it for a long time, and you now owe only $70,000 on your mortgage.  That means in terms of equity, you own a certain percentage of the home which is valued at the price you’ve already paid for it.

That would make the value of your equity $130,000.  If you are in need of money, you could try to get a cash out refinance where you take that $130,000 back out of your home.  This takes the form of a second loan.

If the loan is larger than $70,000 (the amount which you still owe on the home), you can use it to pay off the original mortgage.  After that though, you’ll still be stuck with the cash out refinance loan, since you forfeited your equity in the home and owe all over again.

Many times you can get a lower interest rate this way though, which in some cases is enough to salvage you from a foreclosure scenario. 

Sometimes there is even cash left over, which you can then use for other purposes.  When you do cash out refinancing, you don’t have to pay off your mortgage either.  A lot of people choose to use the money for other purposes, for example to pay for emergency medical bills, college tuition, home improvements, other investments, or other debts.

While the term “cash out” refinancing is used very broadly, its most specific meaning does indeed refer to using refinancing for purposes other than paying off an existing mortgage.

How much money can you get with cash out refinancing?  That depends on a number of factors including the mortgage lender’s policies, the structure of the cash out refinance program that you are interested in participating in, the value of your home, and the value of your equity in the home.

Refinancing can work great for a lot of things, but there is a price you pay—you do lose all the equity which you’ve spent all these years building up in the first place.

You no longer own that portion of the home, and you’re back to square one in that sense, unless you are using the cash out refinancing to pay your mortgage, in which case you still aren’t totally paid off on the home.

If you looked at your home as a savings account though (with negative interest), then perhaps utilizing those savings is not such a bad idea.  It all comes down to your priorities and what you need to accomplish.