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Zhi Finance » What is cash-out refinancing?

What is cash-out refinancing?

A cash-out refinance basically enables a homeowner to refinance their home for an amount greater than the existing mortgage balance. The homeowner pays off the existing balance and additional amounts over the life of the loan and gets a check for more than the existing mortgage balance. The homeowner can use this check for any purpose they choose now and pay off the debt along with the rest of the refinanced amount.

When can I refinance with a cash-out?

Cash out is an option when there is equity in the home. This is important because the lender is able to justify providing more money to the homeowner because of the value of the property. This is because the lender believes that the security of using the home as collateral will not expose them to the high risk of the homeowner defaulting on the loan.

Homeowners who wish to take advantage of cash-out refinancing offered by a lender should ask the lender if they offer this type of refinancing. This is important because not all lenders offer this option. In fact, this should be one of the first questions a homeowner should ask when inquiring about refinancing programs. Doing so will save a great deal of time for homeowners seeking a cash-out refinance.

How will the cash be used?

For many homeowners, the most appealing aspect of cash-out refinancing is that the extra funds can be used for whatever purpose the homeowner desires. The homeowner doesn’t even have to explain to the lender how the extra funds will be used. This is important because once the lender writes the check for the extra funds, he doesn’t care how the money is used. This is because the amount of extra funds is rolled into the refinanced mortgage. The lender is only concerned with the homeowner’s ability to repay the mortgage and not how the homeowner is using the cash disbursement.

While the purpose of the cash-out refinance does not need to be disclosed to the lender, it would be wise for the homeowner to use those funds in a wise manner. This is because the homeowner will be responsible for repaying these funds to the lender. Some popular uses of funds collected from a cash-out refinance include.

* Undertaking home improvement projects

* Buying items for the home

* Taking a dream vacation

* Putting money into a child’s tuition fund or

* Buying a vehicle

* Start a small business

All of the reasons listed above are excellent uses for a cash-out refinancing option. Homeowners who are considering this refinancing option should also consider whether it is tax deductible. Using a cash-out option for home improvements is just one example of how funds can be tax deductible. Homeowners should consult with a tax attorney on this matter to determine if they can deduct the interest from the refinanced loan repayment.

Example of a Cash-Out Refinance

It is fairly easy to use a simple example to illustrate the process of a cash-out refinance option. Consider a homeowner who has purchased $150,000 at 7% interest. Now consider that the homeowner has paid off a $50,000 loan and wants to borrow another $20,000 to make a fairly large purchase or invest in a small business. With this additional capital, the homeowner has the opportunity to leverage the equity in their home to make their dreams come true. In the example above, the homeowner could refinance $120,000 at a lower interest rate (e.g. 6.25%). This process allows the homeowner to leverage the existing equity in their home and also allows the homeowner to qualify for a substantial loan at an interest rate normally reserved for refinancing or home loans.