When Should You Consider Cashing Out Your Home

Cash out financing is an option for home owners who have built up some equity in their home, to refinance for more than is owed, and get cash back. This is always most beneficial when you can refinance your home with a lower rate of interest than your current mortgage. Many people confuse this type of loan with a home equity loan, but they are not the same thing. A home equity loan is actually a second mortgage. With it, you have two monthly payments to make. A cash out loan pays your first mortgage off, and gives you one, single monthly payment.

Things to consider:

  • Take a good look at why you need the money
  • Determine how much equity you have in your home
  • Determine if you can afford a higher payment
  • Research lenders to get the best term

Take a Look at Why You Need the Money

You will, most likely, be extending the length of time you will be making payments and could raise your payments with this type loan. Your home is a huge investment both in money, time, and the future. For this reason it is essential that you protect your investment. If you are faced with a situation where you actually need the cash from this type loan, especially if you can get a lower rate than you are currently paying, it may be a good option for you. As a general rule, you need to be sure that whatever you are using this cash for, it is something that is an investment for yours or your family’s futures. Some common reasons for loans such as this are:

  1. Home Improvement (be sure the improvement will raise the resale value of the home enough to let you see a good return on your investment should you decide to sell later).
  2. Debt consolidation (If you have found yourself upside down, drowning under a mountain of high interest debt, it could benefit you greatly to take advantage of your home’s equity. Just be sure to do your math ahead of time to make sure this is a smart alternative for you).

Determine how much equity you have in your home

Equity is simply the difference between your home’s market value and what you owe on it. A quick call to your lender can usually provide you with the information you seek. When it comes to financing to get cash back, you should understand there are often closing costs and many lenders will not allow you to take out 100% of the amount of your equity.

Determine if the loan will raise your payment and if so, if can you afford it

The interest rate, ideally, would be lower than your current rate, but if it isn’t and your term extends longer than the original, and/or your loan amount is larger than the original, you could be faced with higher payments. It pays to be sure find out ahead of time, so you can determine if you can afford the new payments.

Research lenders to get the best terms possible

Finally, you will want to research lenders to get the best possible terms. You can use a loan broker or a local lender such as a bank. You have options, but in order to get a good start and make the most of your cash out loan, taking advantage of the information and tools provided here will get you off to the best start possible!

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