Cash out refinance

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A cash out refinance involves getting a new mortgage for your home for an amount greater than what you currently owe. This allows you to pull cash out of the equity of your house. Sometimes these types of refinancing arrangement can be used for debt consolidation. In a debt consolidation the lower interest home mortgage funds are used to pay of debt that is at a higher interest rate.

Another common reason to do a cash out refinance is to improve the house. If the value of your house has increased and you can get a mortgage for more than what you currently owe at a good interest rate, pulling out some of that equity and putting it into home improvements may be attractive. Depending on the market, it can also be a very good investment strategy in making your home easy to sell in the future by keeping it up to date and modern.

Why do I have to wait 6 months to get cash out?[edit]

This is a fairly recent new rule for Fanny Mae and Freddy Mac mortgages. However, since most banks want the option of selling the mortgage to one of these two places, pretty much everyone will enforce the same rule. The problem came when people would purchase a home for one price and then immediately turn around and refinance it for a much higher price and take out a tremendous amount of equity. In some cases the equity wasn't really there--they just got an appraiser to say it was worth a whole lot more money. As the real estate bubble burst, these types of refinances were extremely upside down and there was no way the property was every going to sell for the amount that had been loaned on it.

To help keep this from happening, the 6 month rule was created. It basically says that until you have owned a home for 6 months you have to use the lower of the purchase price or appraised value for any type of refinance. So if you buy a house for $100,000 and the appraisal was for $120,000, you can only get a mortgage on the $100,000 value for the first six months.

The downside is that if you do any home improvements, you can't roll those costs into your mortgage for six months.