One way a homeowner can access the equity in their home is by taking out a cash-out refinance loan against the property. In this type of loan, the homeowner takes out a new mortgage against their house, replacing the old mortgage, for an amount greater than the amount they currently owe on the house. The homeowner can finance up to the amount of equity they have in their home, and take the difference in liquid value, i.e., cash.
For example, let’s say you want to consolidate $25,000 in credit card debt, and install wood floors in your home, at a cost of $5,000. If you owe $100,000 on your mortgage and your house has recently appraised at $200,000, you could refinance your mortgage for $130,000 at a lower interest rate, take the difference in cash, pay off those credit cards, and get your floors done. You now have a mortgage of $130,000, but your interest rate on that mortgage is probably lower than the interest rate was on your credit card debt. Plus, you have lowered your interest rate on the mortgage, and remodeled your home.
Why Take a Cash-Out Refinance?
Aside from accessing the cash value of your home equity, there are many other reasons why refinancing might be a desirable option for you. One would be to get a lower interest rate on your mortgage, lower monthly payments, or switching to a different type of mortgage (a fixed interest rate rather than an adjustable rate mortgage, for instance).
There are also many reasons why homeowners would want to take the equity out of their home. Sometimes, homeowners want to access the cash value of their equity for a major expense, such as college tuition, medical expenses, or to consolidate debt. They may also use it to purchase additional property, or make a home improvement that will add value to the existing property.