Cashing Out With a Home Refinance

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One of the most popular loans these days is the cash-out refinance home loan. This is because when one refinances a home with a cash-out option, he or she receives cash in addition to new loan terms. Many people find it convenient to use such loans in order to consolidate debt, make improvements to the home, or to take a vacation.How does a cash-out refinance work?Any refinance loan is one in which you take out another loan to pay off your original mortgage. New terms are negotiated (length of term, interest rate, fees, etc.), and the loan is used to pay off your first home loan. When you have a cash-out refinance, it means that you take the loan out for more than what is owed (this usually works best after at least 7 or 8 years into your repayment). Additionally, the amount you refinance usually has to cover things like closing costs, subordinate mortgage liens, and points. So, in order to have extra money left over for cash, you need equity built up in your home.Borrowing more than your equitySome lenders now make it possible for you to borrow more than what you have in equity, or to refinance for 125% of your home’s value. This is because the lender expects that your home will increase in value over the years, essentially helping you recoup the extra amount borrowed for the cash-out refinance. This can be a very helpful feature of refinancing, but it is important to make sure that you can still afford the mortgage payments. Most people find that payments are still possible to make, as long as they refinance for 30 years.What you can do with the cashWhen your loan is completed, you receive the difference in cash. It is possible to get a smaller amount of cash than you are eligible for, to keep the overall amount of your loan down. Determine what you want the cash for, and then try to keep the extra cash to that amount. For instance, if you are approved to pay off your loan and have $30,000, and you have $15,000 in debt and the vacation you want to take costs $5,000, you only need to take $20,000 in cash to cover those expenses, leaving you with $10,000 less to repay.Other things you can do with the cash include investing in stocks, bonds or funds, using the money as a down payment on some investment property, making home improvements and buying a vehicle. Since the excess comes in the form of cash, you can do whatever you want with the leftovers from your cash-out refinance.