A cash out refinance is a mortgage option where your new loan amount is higher than the total principal between your existing first mortgage and your new, or secondary, mortgage. That also includes closing costs and points for your new loan. This allows the borrower to walk away with cash that can be used for other purposes like home improvement, debt consolidation, or repairs. The borrower, in essence, is borrowing money against the equity in his first mortgage.
Is this beneficial? It depends. It can be.
For instance, let’s say you own several properties and you have two or three badly in need of repairs. These are rental properties that won’t rent unless the repairs are made, but you have no cash available to make the repairs. You can take a cash out refinance on your principal mortgage on these properties and use the cash to make the needed repairs. Then you can rent out the units and use the income to pay off both mortgages.
This is not the only scenario where a cash out refinance can help you. But it is one example. Learn more real estate terms from the Park City real estate glossary.