A cash out refinance is when you take out a new loan to replace your existing mortgage and you receive cash back on the transaction. This money back can be used for any purpose including home renovations, consolidating credit card debt, or other large expenses such as student loans or college tuition. Let’s take a closer look at how a cash out refinance works and when it makes sense to use one.
How a Cash Out Refinance Works
A cash out refinance works by taking out a new loan that is larger than your existing mortgage balance and using the extra money to pay off debts or make other large purchases. The difference between the two loans is then given to you in the form of money. For example, let’s say you have a $100,000 mortgage with a 4% interest rate. You also have $15,000 in credit card debt with an interest rate of 18%. By taking out a cash out refinance for $125,000 and using the extra $25,000 to pay off your credit card debt, you can save yourself a lot of money in interest payments over time.
When Does It Make Sense to Use a Cash Out Refinance?
There are a few instances where it makes sense to use a cash out refinance. If you are planning on making large purchases such as home renovations or consolidation debts, then using a cash out refinance can save you money in the long run. Additionally, if you have other high-interest debts such as student loans or college tuition, then refinancing can help you get ahead financially. Just be sure to shop around for the best interest rates and terms before committing to a loan.
If you are considering a cash out refinance, be sure to do your homework first. There are many lenders offering different interest rates and terms, so it’s important to compare options before deciding on one. That being said, there are certain situations where refinancing makes sense. If you are looking to make large purchases or consolidate debts, then refinancing may be the right move for you. Just be sure to shop around for the best terms and rates before committing to anything. Check out our Refinance Analysis tool so see how much money you can save. If you’re ready to start your cash out refinance journey click the button below!