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?