Cash out refinancing is a way that you can borrow money against the investment you have in your home by refinancing more than the balance you owe on your home mortgage. It’s important to remember that this is, in fact, a loan. It’s not a profit that you’re making off of your home and is definitely not “free money”. That being said, there are some significant benefits that you may be able to take advantage of by using this form of refinancing.
Benefit #1: Money
The most significant benefit is the money you walk away with. The cash out is literally money in your pocket. The amount that you’re allowed to borrow will depend upon the company you’re working with and your credit worthiness. In some cases, you may be able to borrow a high portion of what the home is worth (as much as 85% LTV) and, in some cases, you may have to settle for 70 or 80 percent of the home’s value in the total amount of the refinance.
The actual sum of the money you walk away with depends on how much you refinance for and the difference between that amount and the value of your house. You pay off the balance on your mortgage with the money you refinance and walk away with the balance in your pocket.
Benefit #2: Interest Rate Savings
You may be able to get a lower interest rate by refinancing. This is a strategy that some people use to offset what they’d pay in interest if they kept their current loan. For instance, if you owed $100,000 on a home and had a bad interest rate, you may find that refinancing the home for $120,000, paying off the $100,000 and using the additional $20,000 to pay off other bad loans may get you out of some interest debt that’s coming down the road. This is a rather popular strategy and can save you thousands in interest payments.
Benefit #3: Taxes
If you use the money you get out of your cash out refinance to pay off credit cards or other debt, you may be able to basically transfer that debt to a form—your mortgage debt—that can be written off of your taxes in part. This means that you get more out of the money you pay toward your debts and also means that you can get out of some very common credit traps. You should consult your NOLA Loan Officer as well as your tax advisor to find out what’s best for you!
Some people also use these loans for home improvements, which is a way to bring up the value of the home and, if you plan on selling it, a good way to finance improvements that may end up netting you more out of the sale.