As your mortgage matures, you gain equity in your home. Equity refers to the amount of a home’s value that you actually own. You can gain equity in two ways:

1. Your home increases in value.
2. You pay down your mortgage principal through your monthly mortgage payments. Every time you make a monthly payment on your loan, you gain a bit more equity in your home.

A cash-out refinance takes advantage of the equity you’ve built over time and gives you cash in exchange for taking on a larger mortgage. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and pocket the difference. Unlike when you take out a second mortgage, a cash-out refinance doesn’t add another monthly payment to your list of bills – you pay off your old mortgage and replace it with your new mortgage. For example, let’s say that you bought a home for $200,000 and you’ve paid off $50,000. This means you still owe $150,000 on your home. Let’s also say that you want to make $20,000 worth of renovations. With a cash-out refinance, you take a portion of your equity and then add what you’ve taken out onto your new mortgage principal. This means your new mortgage would be worth $170,000 – the original $150,000 you owed on the home plus the $20,000 you need for renovations. Your lender gives you the $20,000 in cash a few days after closing. When you refinance, you can do anything you want with the money you take from your equity. You can make repairs on your property, catch up on your student loan payments or cover an unexpected medical or auto-bill. Cash-out refinances also usually give you access to lower interest rates than credit cards.