Is it time for a cash-out refinance?

When you refinance your mortgage, you get a new mortgage to replace the current one. And if you have enough equity in your home, you can do a cash-out refinance.

How a cash-out refi works

Let’s say you bought your house a few years ago and have been making mortgage payments faithfully. While you’ve been paying, the home’s value has been rising, and now you owe $180,000 on a house that’s worth $450,000.

In this situation, you could refinance for more than the $180,000 you currently owe. If you wanted to take out $50,000 cash, you could refinance for $230,000: the $180,000 loan balance plus the $50,000 cash you would receive.

You would have to prove you can afford the monthly payments and otherwise qualify for the loan. And you would have to provide the usual documentation of income, assets and debts.

Why do a cash-out refi?

Maybe you also would like to free up cash to pay for home remodeling or improvements, or college tuition payments, or investing in more real estate such as a second home, vacation home, or investment property, paying off other debts such as high interest rate credit card balances, student loans, or auto loan. Possibly you can get a lower interest rate, or lower monthly payment or both.

The most common reason for getting a cash-out refi is to pay for home improvements. Home improvements are a good way to use equity because you’re adding to the home’s value. And in today’s market in Colorado the cost per square foot to add square footage to your home is usually less than the cost to buy a home per square foot.