Real Estate What Is A ‘Cash Out’ Re Finance?

By Bob Schwartz

A ‘cash out’ re-finance basically permits the homeowner to re-finance their home for an amount larger than the balance of the existing mortgage. The homeowners are given a check for the amount above and beyond the balance of the existing mortgage and then repay the existing balance plus the additional amount over the course of the loan period. The homeowners can use the check for any reason they choose now and pay back the debt along with the rest of re-financed amount.

When is a Cash Out Re-Finance possible?

A ‘cash out’ option is available when there is existing equity in the home. This is crucial because the lender is able to justify the practice of presenting increased funds to the homeowner due to the value of the property. This is because the lender thinks that 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 want to take advantage of a ‘cash out’ re-finance offered by a lender, should first ask whether or not the lender offers this type of re-financing. Not all lenders offer this choice. It should actually be the first question the homeowner asks when inquiring about re-financing programs. Homeowners who are seeking a ‘cash out’ re-finance may save a great deal of time.

How Can the Cash be Used?

For many homeowners the most tempting aspect of cash out re-financing is that the additional funds can be used for any purpose desired by the homeowner. The homeowner does not even need to offer the lender an explanation of how the additional funds will be used. Once the lender writes the check for the additional funds, he has no concern for how the money is spent. The amount of the additional funds is simply rolled into the re-financed mortgage. The lender 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 purpose 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. 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

* Buying things for the home * Going on a dream vacation * Putting money in a child’s tuition fund * Buying a vehicle * Starting a small business

All of the things listed above are great uses of a ‘cash out’ re-finance alternative. Homeowners who are thinking about this kind of a re-financing option should also contemplate whether or not the deductions are tax deductible. Using the ‘cash out’ option to make home improvements is an example of a situation where the funds can be tax deductible. Homeowners should check with their tax attorney on the matter to find out whether or not they are able to deduct the interest from the repayment of their re-financing loan.

‘Cash Out’ Re-Financing Example

The process of a ‘cash out’ refinancing option is fairly easy to explain. Consider a homeowner who purchased a $600,000 home some years ago with $60,000 down and a 7% interest rate. Today, if this home is worth $750,000 and a lender will do a 90% cash out loan at 6.25%, the homeowner could receive a new $675,000 loan. After payoff of the existing $540,000 loan, $135,000 would remain. Reduce this by the original $60,000 down payment, and $75,000 could be used any way the homeowner wished. To keep it simple, the small principal reduction of the existing loan or the acquisition cost of the original purchase of the new cash out loan has not been factored in. Before deciding to get a ‘cash out’ loan, one should sit down with their finical advisor and calculate all expenses and tax implications involved. With this additional type of funding available, the homeowners have the opportunity to use the equity in their home to make their dreams come true. This process allows the homeowner to take advantage of the existing equity in their home. Copyright 2008 Promotions Unlimited – websitetrafficbuilders.com. All rights reserved

About the Author: Bob Schwartz, San Diego real estate broker with w/30 years exp. He has a popular San Diego real estate blog Bob’s other sites are: Downtown San Diego real estate & San Diego real estate agents

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