So today we’re going to discuss all things cash out refinance. What is it? How do I qualify? and How much can I take out? But before we get into the cash out rules, it’s important to understand the concept of equity and how you can leverage your home equity to achieve other financial goals.
So let’s start. With equity, as without it, a cash out refinance is not an option. Equity is why we buy real estate in the first place. We buy a home with the hopes it continues to appreciate or gain value over time. How do we determine what our equity is? So equity in a home equals the appraised value of the home minus what you owe on the home.
So let’s go over an example of how this works. For simple math, let’s assume you buy a home for a hundred thousand dollars and you put ten percent down on the purchase. If the home appraisal also came in at a hundred thousand dollars then you would start off with ten percent equity in the home. Ten percent down, you owe ninety percent of the value, so ten percent equity.
Over time you continue to pay down your loan and now you have a balance of eighty thousand dollars. Let’s say the value of the home has increased to 125,000 so now you have 45,000 of equity in the property. We did this with the value of 125 minus what you owe of 80,000. Your initial equity position of 10 has now grown to 36. So this increase in equity is what makes a cash out refinance possible in most situations.