Is Cash Out Refinancing the Right Option for You?

Whether it's a good idea to go with a cash out refinancing option for your home or to choose a home equity loan or line of credit will depend on several factors. These include the terms of the original mortgage, what kind of rates can be had on a new mortgage, and what the money will be used for.

Cash out refinancing is a term many people misunderstand. They think of it as a home equity loan or a home equity line of credit (HELOC). While these are all similar, they are not the same. In cash out refinancing, the entire house is refinanced. The equity that the homeowner has in the home is pulled out, and it can be used for anything the homeowner wants to do with it. A home equity loan or HELOC is a second mortgage against the existing equity in the home. There is no refinancing of the original mortgage with the equity loan or equity line of credit options.

The real question for the homeowner becomes whether he should choose the cash out refinancing option or the home equity option. Several factors can affect that, but the largest of those factors has to do with the terms of the original mortgage. If the original mortgage has very good terms and conditions (low interest rate, no prepayment penalty, etc.), it might make more sense to get a home equity line of credit or a home equity loan, rather than a cash out refinance.

If the terms of the original mortgage weren't good - the homeowner is paying a high interest rate or there are other concerns - cash out refinancing could give the homeowner a better deal overall. The mortgage payment will still rise because the total amount of the mortgage is going up, but the rate of interest and other payment terms may be much better than what the homeowner originally had.

Another important consideration where cash out refinancing is concerned is what the cash will be used for. Paying off high-interest debt is a good thing to do with the equity received from a home, and home repairs are also something a lot of people cash out equity for. Others take vacations, pay for an education for themselves or their children, or do something they've always wanted to do, like start up their own business.

No matter what a person does with the extra money they have when they pull the equity out of their home, they should consider the fact that they must repay that money. They're putting their home at risk, and that can be dangerous if they have financial problems at a later date. More than just the immediate gratification of getting the cash out of their home to use for other projects is at stake.