For many Canadians, owning a home is one of their most sought-after accomplishments. Whatever your reasoning behind owning real estate properties, it is universally known that being a homeowner and paying your mortgage aids you in building equity. With that being said, many Canadians don't know that you aren't required to wait until your home is sold or you have paid off your mortgage to obtain your equity. Homeowners can maintain their current payment or increase it slightly, while tapping into the equity of their home with a cash out refinance. Keep reading to learn about what cash out refinance is and why you might consider using one.

What is a cash out refinance?

As the name suggests, cash out refinancing substitutes your present mortgage loan with a larger mortgage. By doing so, homeowners can tap into the equity they have accumulated on their home by accessing the difference between both mortgage loans and cash funds. The funds can be used for almost any reason, whether to finance a home renovation, make investments, pay off any outstanding loans, etc.

Pros and cons of cash out refinancing

If cash out refinance is something you are looking to consider for your home, here is a closer look at some of the pros and cons of doing so:

Pros

• You are able to lower your interest rate on your new mortgage loan.
• Cash-out refinancing can help you improve your credit score.
• The overall cost of borrowing money is likely to be more affordable than taking out another loan or line of credit.

Cons

• There is a possibility that your interest rate will increase. If this happens, then it may not be worth taking a cash loan refinance.
• This option may cause you to use your equity irresponsibly, such as to pay for vacations rather than improvements to your home or credit score.
• You may extend the term of your mortgage, which result in you paying off your mortgage a later date

What is a home equity loan?

A home equity loan is loan that is registered on your real estate like a mortgage, but the qualifications process is simpler than most institutional lender’s underwriting process. The approval process is generally based off a 3^rd party appraisal that confirms the availability of equity within the home. Once the equity has been established, your broker will provide you the details of your home equity loan.

Home Equity Loan:

1. May not have income qualifications
2. May not have credit qualifications
3. Based solely on the equity available you have in your home
4. Fast and simple approval process
5. Less restrictions of how equity is used

Steps to taking out a cash out refinance

There are three steps to taking out a cash out refinance. Here is a closer look:

1. Determine the minimum qualification requirements of your lender
2. Calculate the amount of equity you require
3. Gather all your necessary documents and information for your meeting with a mortgage loaner