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When you have been living in your house for a few years, most likely you have built up some equity in your home. With the equity value in your home, you can refinance (or refi) your home and do a “cash out deal.” By doing this you can pay off your debts such as high interest credit cards  or get extra money in your pocket to pay for your kids college education, a business venture, or even just money for a rainy day.

How it works

If you have been making regular payments on your house through mortgage payments, and when your home has gain in value, you now have  a difference between how much you owe on your mortgage and how much the house is worth on the local real estate market. The difference is known as the equity. When you refi your house, you can usually borrow anywhere between 90% and 125% of the value of your home (try to avoid borrowing more than your home is actually currently worth). What you borrow is used to pay off the original mortgage, and there is usually money left over. This is given to you either as cash, or the new lender will pay off debts your debts directly.

What can you use your “cash out” from your house refi for?

Your cash from your house refi can be used for a variety of things. Unless the lender has helped you stipulate a specific use for the money (such as home improvement or debt consolidation), you can use the cash out from your house refi for whatever you want. Here are some of the common things that people use their refi cash for:

· Taking a dream vacation or cruise
· Consolidating debt into a single, lower monthly payment
· Improving the property so it has greater value
· Paying off a vehicle
· Covering the costs of a higher education for yourself or your kids
· Investmenting in another property as rental property

Be careful when your refi

When you refi your house for a cash out, make sure that you go about it carefully. Figure out how much you need, and try not to go over that. If you borrow too much that means losing your home when it becomes too difficult to pay back. Make sure to watch out for lenders who try to convince you to borrow more than your home is worth. The assumption is that your home will increase in value to cover the extra, but borrowing more than your asset can cover is not good asset management. Also, make sure you watch out for possible prepayment penalties for your old mortgage upon refinancing.