Home prices have risen to record highs and mortgage rates are hitting record lows. Whether you’ve been in your home for one year or ten, you may want to consider refinancing. If you have equity in your home, you are eligible for a cash-out refinance. The benefits of cash-out refinancing reap short and long-term benefits. But what is cash-out refinancing, you may ask?
What is a cash-out refinance?
A cash-out refinance is a type of mortgage refinance that allows you to take advantage of the equity you’ve built up in your home. A homeowner’s current mortgage is replaced with a larger loan and is then able to pocket the difference in cash.
Let’s say your home is worth $300,000 and you owe $150,000. This means that you have $150,000 in equity to access. With cash-out refinancing, you can tap into this equity for debt consolidation or capital improvements.
What is debt consolidation?
Debt consolidation is the act of using one loan to pay off multiple loans or credit cards in order to simplify your debt repayment. Multiple debts are combined into a single, larger debt or loan, with one interest rate and one monthly payment. If you’re drowning in credit card debt, student loans, medical bills, car payments, or all of the above, cash-out refinancing to consolidate high-interest debts might be the right option for you.
Let’s look at another example. Let’s say you have multiple credit card balances and small loans with different interest rates and monthly payments.
- Credit Card A: $4,500, 20% APR
- Credit Card B: $2,000, 17.5% APR
- Credit Card C: $3,000, 18.7% APR
Rather than paying these balances individually, you can consolidate all three balances with a $9,500 loan and make a single monthly payment. If you cash-out refinance, you can pocket the cash from your home equity and pay off your debts.
What is a capital improvement?
A capital improvement, or home improvement, is a change made to the property that either adds value, prolongs the property’s life, and/or adapts the home to new uses. Common home improvements that qualify as capital improvements include installing a swimming pool, building a fence to enclose the yard, adding additional bedrooms, fixing or replacing the roof, adding insulation, installing storm windows, and installing central air or an HVAC system.
Let’s say you’ve always wanted to renovate your backyard and add a functional outdoor living space as well as an in-ground pool. You’ve crunched the numbers and realized that you need $50,000 to complete the renovation. You’ve decided to cash-out refinance and pocket the $50,000 to complete your backyard renovations! Since you had $150,000 left on your loan, your new mortgage will be $200,000 after cash-out refinancing.
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Originally published March 30, 2018, updated August 11, 2021.