Cash out refinancing is when you refinance your mortgage for an amount that is more than the amount you are supposed to pay back to your lender. If you have been making your monthly mortgage payments regularly and if the principal amount has built up over the years, the equity that has built up can be tapped to get some extra cash when you refinance. This is referred to as cash out refinancing.

The difference of the loan can be used for funding various financial obligations. You can opt for cash out refinancing only if you have enough equity in your property. Often consumers get confused between a home equity loan and refinancing. The prominent differences between the 2 are as follows –

• Home equity loans do not attract closing costs
• In case of cash out refinancing, the interest rates are usually low (not necessarily always) as compared to home equity loan
• Refinancing attracts closing costs.
• Cash out refinancing replaces your first mortgage

When is cash out refinancing a good option for you?

Cash out refinancing is not a good option under the following circumstances –

• If you are being offered a higher rate of interest, it doesn’t make sense to opt for cash out refinancing if the current rate of interest according to which you are making payments is lower.
• If the loan term you had opted for is 30 years and you are already 20 years through, it is better not to opt for the refinancing option.

The cash you get from refinancing can be used for different reasons. The cash can be used for the following –

• You can pay your tuition fees with the money
• If you have enrolled for a debt consolidation program, you can use the money for making payments for the debt consolidation program.
• You can buy a new vehicle with the money
• In case you face an unexpected financial emergency, the cash can help you to pay for the same.
• You can also use the cash for renovating your home