Ways to Use a Cash Out Refinance
As property values continue to rise and homeowners are discovering their overall financial profile keeps improving. Homeowner equity is the difference between what is owed on the mortgage and the current appraised value of the property. As homeowners pay down the mortgage balance more equity is created. So too is equity created simply because the value of the property has grown. When you combine both paying down the loan with ever increasing values still more equity is created. That also means homeowners have access to more cash in the form of equity.
There are two ways to access homeowner equity beyond simply selling the property. A homeowner equity line of credit is in fact a credit line accessible by the homeowners at any time, much like a credit card or personal line of credit. The homeowners can then pay back the amount borrowed in part or in full when due. A home equity line of credit will have a variable rate and can be higher compared to a fixed rate.
When owners are refinancing an existing mortgage to get a lower rate or to perhaps switch from a variable rate to a fixed, they can also elect to pull out a little extra cash during the transaction. Most cash out loan programs limit the amount borrowed to 80% of the value of the property with a slightly better rate if the loan is at 75% or lower. For example the property is valued at $300,000 and there is a $150,000 mortgage. The borrowers refinance to a lower rate and also decide to pull out an additional $25,000 to do some remodeling on their home. After closing costs are deducted the new loan amount will be $180,000. $150,000 to pay off the old mortgage, $5,000 for closing costs and $25,000 for the remodel.
There really aren’t any limitations with regard to the disposition of the cash. Student loans, a college education, a vacation or a new car. There really aren’t any limitations as to what the cash proceeds can be used for. Those funds are yours and you can do with them whatever you please.
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