In many cases, a refinance loan is used to acquire money for things other than paying off the existing mortgage. In essence, the home owner borrows more money than he already owes on the home. This is referred to as the cash out option since the home owner opts to take additional cash out of the equity of his home when refinancing.
Although the original mortgage might get paid off with the proceeds from the refinance loan, other financial matters might be taken care of as well. In particular, refinancing an existing home loan for more money than the homeowner owes to the lender is an excellent way to obtain sufficient funds to consolidate debts.
Consolidating debts into one loan typically lowers monthly expenditure while saving exorbitant interest fees. Instead of retaining a lot of individual accounts each month, the homeowner is able to consolidate all of his accounts into one. Not only does this save him money, but also, it saves him the time and frustration of dealing with lots of small accounts that lead to large fees in interest charges or late fees.
Refinancing an existing home loan for more money than the homeowner owes to the lender is also used for other financial matters. Some of these can include but are not limited to home renovating, education expenses, wedding expenses, vacations, and more.
Since the equity of the home will come into play with the cash out loan, it is important to understand the meaning of the words, home equity. Home equity refers to the current monetary value of the home. It is calculated by taking the current market value of the property and subtracting the current debt owed on the property.
Any additional structures on the property are included in the market value appraisal (valuation). Likewise, all existing home loans are included in the determination of the debt owed on the property. For example, the current market value of the home is R900,000.00. You still owe the bank R200,000.00 You subtract the debt of R200,000.00 from the market value of R900,000.00. The home equity is then determined to be R700,000.00
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