Refinancing can help homeowners save money, which is why it’s such common practice. But not everyone chooses to go with the traditional rate and term refinance. Some folks opt for a cash out refinance instead. Put simply, this is when homeowners refinance for an amount more than they currently owe and get to spend their equity however they choose.
For example, say your home is worth $300K. Due to paying down your mortgage over the years and your home appreciating in value you owe much less than that, in this example $200K. If you do a cash out refinance, you could refinance for a higher percentage of the home’s worth ($250K) and walk away with $50K to do whatever you would like.
Here’s a look at three popular motivators for choosing a cash out refinance option.
Debt consolidation
Let’s say you have $50K in credit card debt at a 21% interest rate(yikes!). Using our pretend scenario above, you could use the $50K you received to pay off your credit card(s). You’ll still have the debt, but since it’s wrapped up in with your mortgage at a much lower interest rate, you’ll be making a significant savings on interest.
Home improvement
Maybe your home needs some updates. Perhaps you’d like to replace your 1970s shag carpeting with some modern wood laminate flooring. Or maybe you’re thinking of remodeling your kitchen to make it more energy efficient. As you may know, the cost of home improvement projects can add up fast. While many home improvement stores offer their own financing programs (usually through a store credit card), the interest rates on these programs are typically high. By using your cash out refinance to fund your projects, you have one less bill to pay and almost certainly less interest to worry about.
Education Costs
They say you can’t put a price on a college education. Well, maybe you can’t, but universities sure can. According to the National Center for Education, the average annual cost for a public, 4-year college can range anywhere from $10,000-$20,000. That $50K from our example would put a dent in the cost of sending a child to college or going back to school yourself.
This information is intended to illustrate the potential uses for a cash out refinance and shouldn’t be substituted for professional financial advice. To learn more about cash out refinancing, contact a mortgage professional.
