While there are many different reasons to refinance your existing mortgage, many homeowners do so with the intention of getting access to cash. A cash out refi is a process that involves getting cash out of the equity in your home by refinancing your primary mortgage.

What is a Cash Out Refi?

The basic idea behind this type of refinance is simple. In order for a cash out refi to work, you must owe less than what your house is worth. You take out a new mortgage
for the full value of your house and then use some of the money to pay off your existing mortgage. The money that is left over after paying off your first mortgage is yours to keep. At that point, you’re left with a mortgage for the entire value of your house and you have some cash to use as you please.

Advantages

Many homeowners
prefer using this method over a home-equity loan because it comes with a lower interest rate, and everything is condensed into a single loan. If you take out a home-equity loan, you’ll have two separate loans on your home. This means that you’ll have to make two different payments at two different interest rates. By refinancing your existing mortgage, you only have one payment to make. The total payment that you make will likely be smaller than what you’d have to pay if you had both a mortgage and a home-equity loan payment to make.

Drawbacks

Although a cash out refinance can be very tempting, it also comes with few potential drawbacks to consider. If you use this process, you will use up all of the equity in your home. This means that it gets rid of an emergency source of cash that you could have tapped into later. If the value of your home declines after you do this, it could put you in an upside-down position on your mortgage. This means that you will be unable to sell your house or refinance again at some point in the future.

Considerations

Using a cash out refinance can be a good way to tap into your equity when you need to. Just make sure that you are only using the money from the refinance for a worthy purpose. Otherwise, you’ll be wasting the equity that you have developed over a period of several years for something that’s not worth it.

Visit Paramount Equity® and talk to a Financial Specialist