While many believe that the only reason to refinance a home would be to lower the interest rate, one of the most popular refinance motivations is to obtain cash out of the homes equity. The truth is that there is almost no way to borrow money less expensively than using the first mortgage on your primary residence. In most cases, the amount of cash you can receive is limited on by the amount of equity that you have.Many investors use the equity they have in their homes to pull money out and invest into retirement funds and other investment accounts. With rates being at all time lows and as low as they have been over the past several years these investors are making much more money off of the interest from their investment accounts than the interest they are paying on their mortgage loans. Therefore using the equity in your home can be used to start or add to investment accounts. Many times the rate for the mortgage will be much lower than the money you are making from the investment account and the interest on the mortgage loan is tax deductible. So by doing a cash out refinance you may be able to make more money on interest earned from investing than the money you will pay for your interest rate on your mortgage loan; all while obtaining a bigger tax deduction each year with mortgage interest.
In addition to most home equity loans having a lower interest rate than credit cards, you are also able to use the interest paid as a tax write off.
Whether or not you can qualify for a cash out refinance depends on several factors, including your credit score; your debt to income ratio; the percentage of your home's value, or Loan To Value, you want to borrow; whether you occupy the home as your primary residence, a second home or an investment property; how long you have been in the home; the property type (Single Family Residence, Condo, Manufactured, etc.)[and the loan program you wish to use (conventional, VA, FHA, Alt-A, subprime, etc.).
Whenever possible you should use cash taken out of equity to increase your home's value. Adding a pool, deck, or guest house will help maintain or increase the value of your home.
A common use for taking cash out of your equity is to pay off other high interest debt. By consolidating all of your debt into your home mortgage, you can save money on the total amount that you spend each month on debt payments. Where people often run into trouble is when they go back out and rack up more debt on their credit cards, buy a new car, or otherwise create more debt. Debt consolidation should not be used as a way to take on more debt, but rather a way to manage the debt that you already have.
