Cash Out Mortgage

Reasons for a Cash Out Mortgage Refinance

Last Updated 12/11/2014

A cash out refinance is a loan that allows homeowners to utilize the equity in their home and receive a larger sum of money when the loan is funded. It is a mortgage refinance where the new mortgage amount exceeds the payoff of the existing mortgage the settlement fees associated with the loan. The sum of money beyond those costs are given to the homeowners. There are many reasons why homeowners choose to do a cash out refinance to meet a variety of financial needs.

Reasons for a Cash Out Mortgage Refinance:

  • Home improvements
  • Other investments
  • Purchasing another property
  • College expenses
  • Vacations & other luxuries
  • To consolidate high interest rate debts
  • For emergencies
  • To settle legal matters

One of the most common reasons people do a cash out refinance is to do repairs or renovations to their home. This has the benefit of allowing the homeowner to not deplete their savings account. It also results in further increasing the equity in the home once the repairs or renovations are completed.

Many choose to use the cash for other types of investments such as stocks or bonds. The rate of return that they yield from cash out mortgage is typically greater than the rate of interest they are paying on the loan. Furthermore, many investors choose to use the equity in their primary residence to purchase a second home or an investment property. They choose the cash out refinance because it typically has a lower interest rate than mortgage loans for second homes or investment properties.

Another common reason for people to do a cash out refinance is to consolidate consumer debt. Homeowners can take advantage of a much lower interest rate from cash out mortgage than what they are paying on unsecured debt and lower their monthly payments.

Others have used a cash out refinance to pay for  their children’s college education. They choose to use a mortgage rather than student loans to avoid the compounding interest on student loans and to reap the tax benefits associated with a cash out mortgage. Some have used the cash received to pay for vacations or other luxuries and some use the proceeds in the event of an emergency, such as paying for medical expenses. Other times the money is used to handle legal matters such as settling a court case, buying out a spouse in the event of a divorce, or paying off taxes.

Things to Consider:

There are risks associated with cash out mortgage refinances. Taking out a larger money against your home means your start your mortgage process over again and likely with a higher mortgage payment. If you find yourself in financial struggles your home is at stake. So be sure you can handle the higher payment and that your reasons for a cash out refinance are justified.

Interest rates on a cash out refinance are typically higher than a standard rate and term refinance. If the current rates for a cash out refinance aren’t as low as your current mortgage you may want to consider getting a second mortgage or a home equity loan. This will help you save in settlement costs and allow you to keep the low interest rate on your current mortgage.

There are definitely benefits and risks associated with doing a cash out refinance. Consider what your needs are for utilizing the equity in your home and determine if a cash out refinance is right for your situation.