What is a cash-out refinance?
A cash-out refinance allows the borrower to access a portion of the equity accumulated in the home as cash. A cash-out refinance gives you access to the equity in your home. Here, you refinance your existing mortgage into a new one with a larger outstanding principal balance, and pocket the difference. The amount of cash you receive is generally based on the difference between your home’s current value and the remaining balance on the loan, but other factors such as occupancy, whether it is a single-family residence, the loan-to-value ratio, whether there is a second loan on the property, etc. come into play
How a cash-out refi works
Let’s say you bought your house a few years ago and have been making mortgage payments faithfully. While you’ve been paying, the home’s value has been rising, and now you owe $80,000 on a house that’s worth $250,000.
You have recently looked up mortgage rates and have discovered that you can snag a lower rate if you refinance. You also would like to free up cash to pay for home remodeling.
In this situation, you could refinance for more than the $80,000 you currently owe. If you wanted to take out $50,000 cash, you could refinance for $130,000: the $80,000 loan balance plus the $50,000 cash you would receive.
You would have to prove you can afford the monthly payments and otherwise qualify for the loan. And you would have to provide the usual documentation of income, assets and debts. Start out by comparing offers from lenders.
Reasons for cash-out refi
The most common reason for getting a cash-out refi is to pay for home improvements, says Rick Sharga, executive vice president and chief spokesperson at Carrington Mortgage Holdings, based in Anaheim, California. Home improvements are a good way to use equity because you’re adding to the home’s value, Sharga says.
Another popular reason to get a cash-out refi is to pay for college tuition, he says.