The Ultimate Guide to Cash Out Refinancing: Unlocking the Hidden Equity in Your Home

Refinancing your home can be a useful way of getting a better deal on your mortgage. Sometimes, borrowers opt for cash out refinancing to access some of their equity as well.

Cash out refinancing involves refinancing your home loan to a larger amount and taking out a portion of your built-up equity as 'cash'. This allows access to a potentially large pool of funds, depending on how far you are into your home loan.

It's important to note that cash out refinancing is not a cashback offer. While a cashback offer is when a bank gives you money for refinancing with them, cash out refinancing accesses funds from within your newly refinanced loan.

Let's say you buy a property valued at $1,000,000 with a 20% deposit ($200,000). The bank gives you an $800,000 loan. After some time, you've contributed another $200,000, raising your equity to $400,000. You could then refinance to a better loan due to your improved loan-to-value ratio (LVR) of 60%.

If you needed $200,000 for an investment property deposit, a cash out refinance could provide quick access to those funds. However, your refinanced home loan would likely end up being larger.

Cash out refinancing can improve your home loan terms while giving you access to a large sum of your home equity. It's particularly useful for significant purchases that might otherwise take too long to save for, such as medical emergencies or paying off high-interest debt.

People often use cash out refinancing for:

• Paying off high-interest debt
• A second home deposit
• Medical emergencies
• Home renovations.

The main downside is that you'll be resetting much of the equity you've built up over time. If you're already struggling with repayments, a cash out refinance could worsen your situation.

Additionally, approval for cash out refinancing requires a good credit history and sufficient home equity. There are also fees associated with refinancing, such as discharge fees, application fees, and possibly stamp duty.

Cash out refinancing works best for borrowers planning to have their home loan long-term and who can afford it. It requires financial know-how and good money management skills.

One of the first things to look for in a cash out refinance is that the bank you’re refinancing to actually has a cash out option. Provided that they do, you should make sure that you:

• You can make repayments on your refinanced loan
• You have a concrete plan for spending the cash out
• You've compared home loans to find one with a good interest rate, low fees, and useful features.

Also, it might be a good idea to double check if what you want to do with a cash out refinance can be achieved by some other method. For instance, some home loan providers offer ‘extra’ cash for refinancing with them, although this tends to be about $3,000-$4,000.

Provided you’ve made the decision for a cash out refinance and you know who you’re going to refinance with, you’ll have to go through the home loan application process.

Also, you’ll need to inform your current home loan provider so that you can get the necessary documentation to refinance your loan.