Home Equity Loans & Cash Out Refinances
A cash out refinance is when the owner of a property takes out a new loan that replaces the old loan plus an additional amount that the borrower receives as a liquid amount. This cash can be used like any other cash to purchase or invest as they desire.
The cash out refinance is not the same as the standard refinance because the standard rate/term refinance the old loan is paid off and replaced with another loan with either a changed term such as going from a 30 year to a 15 year, a 15 year to a 30 year, to lower the interest rate, to move from a fixed interest rate to an adjustable to lower the payment, or from an adjustable to a fixed interest rate and get them into a safe and reliable monthly payment for the duration of the loan.
Since the last financial crisis, interest rates have been brought down to record lows. Because of this, the opportunity cost of doing a cash out refinance or taking out a home equity mortgage loan is much lower. This is because the interest rate that you would qualify for at the time of this writing is likely to be much lower than it was in the pre-crisis period.
You are most likely going to get a much lower interest rate on a home loan than you would on an unsecured personal loan or credit card because the home loan is secured by real estate, this means that the lender takes on less risk and so market forces usually command a lower interest rate. It is also for this reason that so many people in the United State are looking toward home equity loans, cash out refinances and even second mortgages for consolidating their debt.
By consolidating their debts into a mortgage loan, borrowers are able to free up some cash flow. They are able to do this because they are lowering their interest rate, stretching out the payoff term changing their interest type away from the highly credit toxic daily compounding interest rate of a credit card and from stretching the payment term out to the repayment term of the mortgage loan. There are sometimes costs associated with a refinance though so it is in your best interest to talk to a mortgage industry professional so that you may run a return on investment analysis to make sure the associated costs make sense. Most lenders will also have no cost options as well.
People also use cash out refinances, home equity loans and second mortgages because they need liquidity and or cash flow, or to make a home improvement such as adding a pool or solar panels. Rather than come out of pocket for what could be tens of thousands of dollars, they pull money from their equity instead. In any case, make sure you are taking your long term as well as short term goals into consideration before you commit to a loan program.