A cash-out refinance allows you to tap your home's equity for a lump sum of cash. You can then use the cash for any purpose, including boosting the size of your savings account. A cash-out refinance, however, isn't always the easiest process. You'll have to follow certain rules and meet specific guidelines to successfully complete such a refinance.
In a cash-out refinance, you refinance your mortgage loan for more than what you owe on it. You then receive a cash payout for the extra money. If you owe $90,000 on a home worth $180,000, you can refinance for $110,000 and take the extra $20,000 as a lump-sum payment. Your equity is important here. Most lenders won't allow you to refinance unless you have 20 percent equity in your home. This means that if your house is worth $200,000 and you owe $190,000 on it, you won't be able to refinance for $200,000 and take the extra $10,000 as a cash payment. That's because a $200,000 refinance would leave you with no equity.
Once you complete a cash-out refinance, you can use the money you receive for any purpose. Many homeowners use it to help pay for their children's college education or to cover the costs of a home renovation. Others use it to pay off credit card debt that comes with high interest rates. You can deposit your cash directly into your savings account.
Does it Make Sense?
You must decide if going through a cash-out refinance just to boost your savings makes sense. This depends on how much interest your money will earn in a savings account. Many savings accounts offer generally low interest rates. Your money, then, might not grow as quickly as you'd like. It might make more sense to deposit your cash into a mutual fund or another higher-reward investment vehicle.
To start a cash-out refinance, call any lender licensed to do business in your state. Comparison shop to find the lowest interest rates and fees. You'll have to fill out a Uniform Residential Loan Application -- a form that asks for your personal information, annual salary and monthly debts. You'll also have to copy such financial documents as your two most recent paycheck stubs, last two monthly bank statements and last two income tax returns. Your lender will use these to verify your income. Your lender will also pull your credit report and schedule an appraisal of your home to determine how much your residence is worth. If all your financials check out and if your home's value is high enough, your lender should approve your request for a cash-out refinance.
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