A cash out refinance is a great way to get the cash you need for important expenses, and the best part is that you are taking full advantage of your home equity by doing so.  Do you remember the old nursery rhyme about the old woman who lived in the shoe? In the modern story, the mother would live in a piggy bank, and so would her neighbors.

You see, homeowners tread their homes like piggy banks. They move their equity into a liquid cash or credit. You have the common home equity lines of credit, reverse mortgages, and home equity loans. However, there is one more we did not mention…cash out refinance.

Refinance with Cash Out

Basically, a cash out refinance loan enables you to refinance your mortgage for more than you owe on the property (this also works with a bad credit refinance). You are then able to pocket the difference between the two.

Let us look at what a cash out refinance calculator would do (we will perform the calculations manually). Say you owe $90,000 on a $200,000 house and you would like to have a lower interest rate. You would also like to have $30,000 in cash to spend on tuition. You would refinance the loan for $120,000. You would then get a better rate on the $90,000 and pocket the rest.

Cash-out Refinancing VS. Home Equity Loan

• A home equity loan has top priority, even before your first mortgage.
• A cash out refinance replaces your first mortgage.
• Cash out refinance rates are almost always lower than home equity loan rates.
• You have to pay closing costs with a cash out refinance.

Is Cash Out Refinancing the Right Choice for Me?

In order to decide if this sort of refinance is right for you, it is important to do a cost-benefit analysis. You need to figure out how much you are going to be saving each month and also what you would like to spend the money on.

It depends on how much you would save each month and the purpose of the cash back option.

If you determine that your monthly savings is worth the added hassle of a refinance, then you should proceed with the refinance. However, if you are only doing the refinance so that you can take a family vacation then it is probably not the best decision.

Change Your Spending Habits

Looking closely at how you will use the cash is a great way to avoid wasting your money. Is the cash for a long-term or short-term purpose? You are going to be spending 15 to 30 years paying off your loan so it makes sense for your spending to be for something long-term.

Taking a long vacation may seem nice right now, but paying for it for 30 years will make it seem a lot less appealing. Even spending the money for something like a wedding is not very wise. There are other ways to obtaining financing for such an event. Think about what you are doing very carefully. Following this simple step will help keep you out of debt in the long-term.