Definition:
This type of loan modification/addition involves using the existing equity in a home in order to obtain cash or credit. For instance, in a $300,000 home, let us say there is a $150,000 mortgage and the owner has the other $150,000 in equity. He wishes to use that equity to obtain a $50,000 loan. In a cash-out refinancing, he can convert $50,000 worth of equity into cash by either refinancing his existing mortgage at $200,000 (and thereby obtain the $50,000 difference in cash or credit) or add a home equity loan on top of the existing mortgage in exchange for cash or credit. These two methods are useful in different situations: the refinance option is good if interest rates are lower than your current interest rate, thereby guaranteeing you a slightly lower rate overall on the grand total; the home equity loan option is good if interest rates are higher than your current interest rate, meaning you'd pay the lower rate on the mortgage and the current higher rate on the home equity loan.
