Using Refinancing As A Way To Cash Out Home Equity

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American homeowners have different reasons to refinance their old mortgages. Of course, some people just hope to get a lower interest rate that will reduce their monthly payments or let them pay their houses off faster. Lowering interest rates is one good reason to consider refinancing.

However, many people also use mortgages as a way to cash out the equity in their house. If the value of a home is greater than the mortgage balance, homeowners might qualify for a new loan that is greater than the amount that they owe on their old mortgage. Once the old mortgage has been paid off, the borrower can take a cash payment for the difference between the old mortgage balance and the amount of the new loan.

Typically, homeowners can refinance a home for about 80 percent of the market value. For example, an appraiser might value a home at about $200,000. This means that 80 percent of that market value is $160,000. If the owner only owes $100,000, it might be possible to take a check for $60,000 after the new mortgage closes.

Refinancing Statistics From 2015

The Federal Home Loan Financing Corporation is almost always called Freddie Mac. It’s a public company that is sponsored by the government in order to make it easier for Americans to qualify for mortgages. This company recently published statistics about refinancing that might be useful for people who are considering refinancing their own house or are in the mortgage business.

Refinancing Statistics, for the third quarter of 2015:

  • Average age of the replaced loan: 7 years
  • Total amount of home equity cashed out: $12.2 billion
  • Average percentage of the new loan that is used to cash out: 10.6 percent

An average of about 10 percent of the loan may not sound like a lot. However, that would be $10,000 on a $100,000 mortgage. This might be enough for some folks to catch up on credit cards, help their kids with college tuition, or invest in a good business opportunity. Some people may not be aware that they could use their home equity this way, so it’s always good to know about different ways to raise cash.

Is Refinancing an Old Mortgage Always a Good Idea?

Refinancing is not the best solution for everybody. Most of the time, it takes a few years for homeowners to build enough equity in their home to be able to cash out. Also, there may be some fees and other costs associated with refinancing. Finally, refinancing may increase total debt and the number of years that it will take to pay off a house. It’s not the best solution for everybody.

On the other hand, it might be possible to roll some of these extra expenses back into the new mortgage, so borrowers don’t have to come up with cash. Homeowners who have equity in their homes should be aware that they might be able to cash it out when they need it.