A cash out re-finance mainly enables the homeowner to re-finance their home for
an amount greater than the balance of the exiting mortgage. The homeowners than
repay the existing balance plus the additional amount over the course of the
loan period and are given a check for the amount above and beyond the balance of
the exiting mortgage. The homeowners can use this check for any purpose they
choose now and repay the debt along with the rest of re-financed amount.
When is a Cash Out Re-Finance possible?
Cash out is an option when there is existing equity in the home. This is
important because the lender is able to justify the practice of offering
increased funds to the homeowner due to the value of the property. This is
because the lender feels as though the security of having the home for
collateral does not put them at a high risk for the homeowner defaulting on the
loan.
Homeowners who desire to take advantage of a cash out re-finance offered by a
lender should ask about whether or not the lender offers this type of
re-financing. This is important because not all lenders offer this option. It
should actually be one of the first questions the homeowner asks when inquiring
about re-financing programs. Doing so will save homeowners, who are seeking a
cash out re-finance, a great deal of time.
How Can the Cash be Used?
For many homeowners the most attractive aspect of cash out re-financing is that
the additional funds can be used for anything desired by the homeowner. The
homeowner does not even have to offer the lender an explanation of how the
additional funds will be used. This is important because once the lender writes
the check for the additional funds, he has no concern for how the money is used.
This is because the amount of the additional funds is rolled into the
re-financed mortgage. The lender simply focuses on the homeowner�s ability to
repay the mortgage and is not concerned with how the homeowner uses the funds
which are released in the cash out.
While the rational of a cash out re-finance does not have to be disclosed to the
lender, the homeowner would be wise to use these funds in a judicious manner.
This is because the homeowner will be responsible for repaying these funds to
the lender. Some of the popular uses for funds collected from cash out
re-financing include:
* Undertaking home improvement projects
* Purchasing items for the home
* Taking a fantasy vacation
* Putting money in a child�s tuition fund
* Purchasing a vehicle
* Starting a small business
All of the reasons named above are excellent uses of a cash out re-finance
option. Homeowners who are considering this type of a re-financing option should
also consider whether or not the deductions are tax deductible. Using the cash
out option to make home improvements is jus one example of a situation where the
funds can be tax deductible. Homeowners should consult their tax attorney on the
matter to determine whether or not they are able to deduct the interest from the
repayment of their re-financing loan.
Cash Out Re-Financing Example
The development of a cash out refinancing option is fairly easy to show with a
simple example. Consider a homeowner who purchases a $150,000 with a 7%
interest. Now consider the homeowner has already repaid $50000 of the loan and
would like to borrow an additional $20,000 to make a rather large purchase or
invest in a small business. With this additional funding available the
homeowners have the opportunity to use the equity in their home to make their
dreams come true. In the example above the homeowner may refinance for a total
of $120,000 at a lower interest rate such as 6.25%. This process allow the
homeowner to take advantage of the existing equity in their home and also allows
the homeowner to qualify for a substantial loan at a rate typically reserved for
re-financing or home loans.
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