How to Refinance and Get Extra Cash

George Lopez | August 1st, 2017

Use the equity in your home to help you achieve your financial goals

A growing number of homeowners are taking advantage of today’s low interest rates to refinance their mortgages and obtain extra cash at the same time. Until recently, this type of refinance (sometimes called a “cash-out refinance") wasn’t an option for many homeowners. However, as property values in almost every part of the country continue to rise, more and more homeowners are utilizing this simple financial strategy to get extra funds to make home improvements, pay off other debts, or even pay for college tuition.

According to the most recent Case-Shiller Index Report, home prices increased 5.6% compared to May 2016, extending a long trend which began several years ago. This rally in home prices has probably helped increase the amount of equity in your home which you can access by simply refinancing your mortgage.

The process of getting the cash is simple — the lender performs an appraisal on your home to determine how much equity you have in your home. Assuming the value of your home has increased, the lender pays off your old mortgage and gives you a new mortgage based on the appraised value of your home. After the loan closing, the lender gives you the cash difference between your old mortgage and your new mortgage, less any closing costs.

There are a number of sound financial reasons in favor of this type of cash refinancing:

The extra cash you receive from refinancing is almost always tax-free. Since home equity isn’t considered to be income by the IRS, you can refinance and get extra cash without incurring an additional tax expense. By comparison, if you liquidate stocks or other financial assets you run the risk of having a hefty tax bill to pay the following April. Please consult your tax professional for more information.
Refinancing can be a great way to pay for home improvement projects. Reinvesting in your home can pay big dividends, especially in the long-term. Refinancing allows you to pay for a large home improvement project such as a kitchen remodel, a new roof, or a new addition without having to tap into your personal savings or other investments. Best of all, by reinvesting in your home, you can enjoy your new amenities while adding value to your home at the same time.
Refinancing can help you get rid of your Home Equity Line of Credit (HELOC) before it resets. In the past few years, many homeowners have obtained a second mortgage line of credit (also known as a HELOC). Many of these HELOCs come with an adjustable rate feature. HELOCs can be very risky because in addition to the variable interest rate, many HELOCs require you to make “interest-only” payments during the early years of the loan. However, when your HELOC ultimately resets, you have to begin making much larger principal payments. A cash-out refinance can help you dodge this bullet by enabling you to consolidate your two mortgages into one and thereby reduce your overall monthly payment.
You may be able to keep your new mortgage payment the same or perhaps even reduce it. Interest rates continue to remain near historic lows. Depending on the amount of your old mortgage payment and the amount of your new mortgage, by refinancing at today’s low rates, you may be able to obtain the extra cash you need without increasing your overall mortgage payment, or at least keep it relatively close.

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