Cash Out Refinancing
A cash out refinance can be a great, low interest, way out of debt, but it's not something that should be done lightly. Because of the risks involved you want to look at your options, and your budget, very carefully before making this decision.
Refinancing means to finance again. You are getting a new loan and using it to pay off your old loan. This is typically done with mortgages, so we'll look at that as an example for this article. When you've been paying on your home loan for a while the money you have already paid off on your home is known as equity. Let's assume you have a $300,000 home. You have already paid off $200,000, meaning you still owe $100,000 on your property.
When you do a cash out refinance you get a new loan on your home, for $150,000. You use $100,000 to pay off your old home loan that you still owe on, and the other $50,000 is your cash out, the money you are going to use for paying off your debts, or doing major home improvements.
This frees up some money for you to use for whatever needs you may have, and also gives you the opportunity to take up the advantages of refinancing. If you were unhappy with the payment terms, or the interest rate, of your original mortgage, you now have the chance to change these things. Finding a lower interest rate is a great reason to look for a new loan, and can really save you money.
But as a I said in the beginning of this article, there are some important things to consider before doing this. First of all, doing this means it will take you longer to pay off your mortgage because now you owe more on your house. You have less equity in your home. There is also the concern that the extra money you needed will now raise your monthly mortgage payments. If you find you can't afford to make the payments like you thought, you run the risk of losing your home. If you got the funding in another way, for instance, by using your vehicle as collateral for a secured loan, or getting an unsecured loan, and then fail to make payments, you will still have your house.
If you have a strict budget plan, and money set aside for an emergency fund, this hopefully shouldn't be a problem for you, but is definitely something to consider before moving forward.
When done very carefully a cash out refinance can be a straight forward way to both free up some money, and get a lower interest rate on your mortgage.
by: Jennifer QuilterAbout the Author:For information about how to actually do all of this, check out How Does Refinancing Work and my article, refinancing a mortgage explained.