Home equity is the difference between the amount of money that is owed on a home and the fair market value of the home. A homeowner might choose to tap into this equity by receiving money paid to him or her based upon the equity in the home; this money is called “cash out.” Commonly, a homeowner can refinance a mortgage or obtain a home equity loan to receive this money. When a homeowner receives cash out of his or her home, the mortgage or home equity loan is increased by the amount of cash out to the homeowner.
One way that a homeowner might choose to receive cash out is by refinancing the mortgage on the home. If the home is worth more than the principal balance owed on the mortgage, a new mortgage with a larger principal amount is created; part of the proceeds of the new mortgage are paid to the homeowner as cash out, and the rest of the new mortgage is used to pay off the existing mortgage. The home then serves as collateral for the new, larger mortgage.
Another way that a homeowner might choose to receive cash out is by obtaining a home equity loan. A home equity loan is made based upon how much equity the homeowner has in the home. For example, if a woman owes $70,000 US Dollars (USD) on her mortgage and her home is worth $80,000 USD, she might choose to get a home equity loan of as much as $10,000 USD. The proceeds of the home equity loan are paid to the homeowner as cash out.
The home equity loan is separate loan from the mortgage even though both loans use the home as collateral. A homeowner must make payments on both loans until at least one of the loans is paid off. If the homeowner does not make timely payments on both loans during this time, he or she will become delinquent on the home and might be assessed additional fees.
A homeowner is not required to take the full value of his or her equity when refinancing a mortgage or obtaining a home equity loan. If the mortgage is refinanced on the home, the mortgage amount will include the balance of the previous mortgage, the cash out amount and any fees, points or other charges related to financing the mortgage. A home equity loan might also be created for less than the total equity that the homeowner has in his or her home.