Cash Out Refinance: What It Is, How It Works & Should You Do It

The world of lending and borrowing money from financial institutions has definitely seen some changes in the past few decades. In the past, you simply had one option and you could decide whether to use it or not when you want to buy something, such as a home, for example. Nowadays, though, there are various different opportunities that people can use to their advantage in order to actually benefit greatly while borrowing money this way. Of course, not all of those opportunities are always as great as they seem, and people have learned their lesson, meaning that they will never rush into using any of these options before first figuring out how they precisely work.

For example, if you have been hearing a lot about the option of cash-out refinancing, you are highly unlikely to just jump on board based on what you have heard. Instead, you will decide that you need to get much more information in order to be able to make such a decision regarding whether jumping on board is the right thing to do in this case or not. You are responsible enough to know that rushing into any kind of financial decision is never a good idea, which is precisely why you aren’t keen on rushing into this specific one.

Yet, you cannot deny the fact that the cash out refinance option has definitely grabbed your attention and that it has started sounding quite appealing based on those things that you’ve heard by now. Yet, since you understand that making any decisions based on scarce information is never a smart move, you’ve actually decided to get your facts straight and learn practically everything you need to know about this particular opportunity. Doing the learning will certainly help you decide if this is a solution that you want to use to your advantage or if it is something that you should just forget about.

Well, if you are ready to go through the learning process, then you have certainly come to the right place. Here is what we are going to do. I know that you probably have a lot of questions about the cash out refinance opportunity, and I am now going to provide you with the answers to some of the most basic ones that are probably circling around your mind. Basically, I’ll help you understand what this solution entails and how it actually works, which is bound to help you with your final decision on whether to use it. So, without any further ado, let us begin answering those questions for you.



Cash Out Refinance: What It Is, How It Works & Should You Do It


What Is Cash Out Refinance?

It is perfectly logical for us to begin by addressing the most basic question here. After all, it’s not like you can start digging deeper into this entire opportunity without actually knowing what it is in the first place. Sure, you might have heard a few things about this option already, which has led you towards believing that you know precisely what it is, but let us not take our chances. Who knows what you have heard and what the people around you have told you. So, it’s time to set the record straight and help you realize once and for all what this option actually is.

When you were first getting your home, you had to agree on a mortgage and you are now repaying it month after month. This was most certainly a smart decision since you wouldn’t have been able to get a home differently and you are now a homeowner thanks to the fact that a lender was willing to give you a great mortgage opportunity. And, as a responsible payer, you are not worried that you won’t be able to repay the mortgage and then finally be able to say that the house is yours and that your bank has nothing to do with it.

Wouldn’t it be nice, though, if you could, say, lend some more money with the aim of perhaps renovating your home or doing practically anything else with it, but without having to pay another monthly installment for a new loan? Well, that undeniably does sound amazing, but the truth is that you don’t have a magic wand that will make it happen, meaning that you should just drop the idea. While I can undeniably agree that no magic wand can help you get the money you need, I have to say that there is actually a different, and yet equally amazing, the solution to your problem.

I suppose you get where I am going with this, so here’s an introduction to the concept:

To cut right to the chase, the solution I am talking about is called cash out refinancing. Basically, this is an opportunity that allows you to refinance your mortgage and practically access any home equity that you might have. In different words, you can get a loan that is bigger than the one you already have for your home, and then repay your old loan with it while getting the opportunity to keep the rest of the money and spend it practically on anything you want. So, you’ll get the money you need without having to agree on paying an additional amount of money on a monthly basis for a new loan.


How Does It Work?

I am quite certain that you already know how refinancing in general works, but there is a chance that the cash out option is confusing you a little bit. Well, let me tell you right away that there is nothing confusing about it at all and that you are simply puzzled because you are not sure that the idea you have in your mind about how this works is actually the correct idea, because it probably all sounds a bit too good to be true for you. The simple truth is that it works just like the actual term says it.

In short, you get to refinance your mortgage and you get to “cash out”, i.e. get all the left over amount of money in cash to use it how you see fit. This is undeniably a great opportunity for many people in many situations, so I can certainly understand if it sounds too good to be true. Yet, there are disadvantages to this solution as well, and you need to get familiar with those even though you are probably thrilled about the advantages.

To put it as simply as possible, the interest rate can actually be quite higher for a cash out refinancing option, and that will depend on how much cash you want to receive, as well as on your general credit score. Even so, the idea that you can cash out up to 80% of your home equity is still quite amazing and people are generally ready to see past those rates and past such a disadvantage, especially when they need the money. Now that you understand how all of this works, you’re most likely completely ready to make your decision on whether you should do this. Here is a good read that can help you make that decision if you’re still not sure.


Should You Do It?

If you want me to answer this question for you, then here is what I have to say about it. There are a lot of great reasons why you should do this, but there are also a lot of situations in which you shouldn’t even think about doing it, meaning that it all depends on your individual financial situation, on your capabilities and on your needs. This is why the best thing to do is weigh all the pros and cons, and talk to an expert that can advise you on whether doing a cash out refinance might be a smart move for you at the moment.


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