Rising home values in many parts of the country may offer you an unexpected source of funds—available through a cash-out refinance. Tapping into the equity in your home is not a decision to make lightly, but in some circumstances, it can be a sound financial move.

How does a cash-out refinance work?

First, you need to own your home and have some equity in it—in other words, you must owe less on the mortgage than the home is worth. For example, if your house is worth $300,000 and the balance on the mortgage is $100,000, then you have a home equity of $200,000.

With a cash-out refinance, you could replace your current mortgage with a new one for more than what’s still owed and then take the difference in cash. Using the example above, you could refinance your $100,000 loan with a new loan of $150,000 and get the $50,000 difference in cash.

When might a cash-out refinance make sense?

Want to learn about other reasons to refinance? These questions could help you save money.

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  • You might consider a cash-out refinance when interest rates are low—or at least lower than the rates on your current loan.
  • If you have high-interest credit cards, you could use the money from a cash-out refinance to pay off the balance.
  • When you need to make a major purchase, such as a new roof or HVAC system, and don’t have the funds to pay for it, refinancing could provide those funds.

What else should you know about a cash-out refinance?

  • When you refinance, you may be able to get a lower interest rate than you’d get with a home equity line of credit or a home equity loan.
  • You won’t be able to take 100% of the equity out in cash. Most banks will limit the amount you can get to 80% or 90% of the equity you have in your home.
  • You will have to pay closing costs—typically 2% to 5% of the mortgage amount, on average—so do the math and make sure refinancing is worth it.
  • You’ll need to buy Private Mortgage Insurance (PMI) if you borrow more than 80% of the home’s value. The cost of PMI depends on a number of factors, but generally speaking it could run from approximately 0.25% to 2% of your loan amount per year until you have paid off enough of the loan to cancel it.

Access Your Home’s Value

See how a cash-out refinance can help. You can count on AAA to guide you through the process.

Products offered by Auto Club Trust, FSB. Equal Housing Opportunity Lender. NMLS #799629 Member FDIC.

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