Cash Out Refinancing Loans: A Practical Use of Home Equity

Paying a mortgage is not something that should be taken lightly. Which perhaps explains why it might seem strange for someone to take on another mortgage when repaying their original loan is going so well. But a cash out refinancing loan is often a very practical use of growing home equity that can help to slash debts and lower monthly obligations.In fact, generally, the result of using home equity to refinance loans is a better quality of life, lower interest rates, higher credit scores and an altogether much better financial situation. So, what can be so strange about that? There can be little surprise then that loan refinancing through home equity has become a popular option for home owners.How Refinancing WorksThe key point to remember is that a mortgage is not something that is short-term, so eventually a cash out refinancing loan becomes possible. For most of us, a mortgage period of between 25 years and 35 years is common but what most people fail to realize is that as the loan is repaid, larger and larger parts of the home is effectively bought back.The result is that, as time goes by, the value of the property that is free from the debt increases making using home equity to refinance loans possible. For example, with a mortgage worth $250,000, which demands monthly repayments of perhaps $1,000 over 25 years, more than $50,000 of the principal will have been repaid after 5 years. That means there is home equity of $50,000 available, and a loan of that sum can be secured.Add to that the fact that property values generally increase over time, and loan refinancing through home equity could reap as much as $75,000, if the property increased to $275,000 in value by the fifth year.The AdvantagesOf course, a cash out refinancing loan is worth nothing if it only succeeds in getting the borrower deeper into debt. So, it is important that the sums are done accurately. The interest rate of the refinancing loan is generally lower because, when using home equity to refinance loans, the initial mortgage is repaid too.For example, if a cash fund of $40,000 is needed, then a loan of $240,000 is taken out. This is because the remaining balance of $200,000 on the initial mortgage must also be cleared. Since that loan is cleared, the credit rating in increased, thereby entitling the applicant to a lower interest rate.With less principal to repay and lower interest to pay, the monthly installments are also lower. In this way, loan refinancing through home equity actually improves the financial situation of the borrower.Using the Extra CashSo, what can the extra cash raised through cash out refinancing loans be used for? Well, since the loan is effectively a secured loan, with the portion of home equity being borrowed against essentially handed over as collateral, the cash can be used for anything.The wisest of us, of course, will take the opportunity to clear other existing debts, so as to further improve their credit score. Existing credit cards can be repaid in full, outstanding bills can be paid and perhaps another personal loan can be repaid in full. The fact is that by using home equity to refinance loans, the initial mortgage is repaid too.For many of us, the need for loan financing through home equity is created by a sudden large expense, such as an emergency medical bill, for example. To this end, the real worth of being able to turn home equity into cash, quickly and conveniently, comes ringing through.So, essentially, cash out refinancing loans can serve as an excellent emergency fund.