Cash out refinancing is when you refinance your mortgage for more than you currently owe and the remaining balance goes to you. You are able to basically borrow more money against your mortgage. Cash out refinancing is similar to taking out a second mortgage or home equity loan or HELOC. When you cash out refinance you are technically, paying off your current mortgage and replacing it with a new one.

Many Uses For Cash From a Refinance

People who choose cash out refinancing as a way of financing usually use it for home improvements, debt consolidation, college tuition or any other financial need. The total amount that you can borrow is directly proportioned with how much you owe on your home, your home’s value and the type of lender you choose. Most lenders will allow you to borrow anywhere between 80 – 125 percent of your home’s value.

In order to help you discern whether or not cash out refinancing is the right choice for you, the following is a list of the pros and cons.

Pros

* Cash out refinancing is usually easy to qualify, because you already own the home.
* When you need money easily, cash out refinancing allows you to take the set sum without any restrictions for what the money will be used for.
* If you use the loan to pay off other debts, then you are entitled to deduct the interest.
* Cash out refinancing is another avenue for obtaining a lower interest rate, because the interest rates are usually lower than other types of refinance loans.

Cons

* There may be hundreds or even thousands of dollars in upfront closing costs, when you opt for a cash out refinance loan.
* If your home loses value, then you could be in financial trouble when you go to sell it.
* PMI is higher when you borrow more than 80 percent of the value of your home.

Furthermore, if you do use a cash out refinance loan, then its best to spend the cash in a way that you can profit from it in the future, such as a home addition, starting a business or getting a degree.