What is a cash-out refinance?
A cash-out refinance, or “cash-out refi,” is when a mortgage is refinanced for more than what is owed and the borrower takes out the difference in cash.
As you make your mortgage payments, the equity in your home increases and the balance of the mortgage decreases. You also can accrue equity if the home values in your area appreciate. If you want to access the equity in your home, a cash-out refinance is one way to do so.
There are fees associated with a cash-out refinance, such as closing costs and mortgage points. The lender may charge a higher interest rate for a cash-out refinance than for a conventional mortgage. Terms for cash-out mortgages usually vary from 10 to 30 years.
A cash-out refinance mortgage is a common alternative to the home equity loan. While home equity loans usually have lower fees, the mortgage for a cash-out refinance often has a lower interest rate. However, the home equity loan is an additional loan (and payment) on top of your regular mortgage payment. The cash-out mortgage replaces your original mortgage and mortgage payment.
Cash-out refinance example
Common reasons for taking out a cash-out mortgage include paying for home renovations, covering tuition expenses or buying a new vehicle.
For example, assume that you want to complete home renovations with an estimated cost of $60,000. Your home has a value of $250,000, and you owe $100,000 on the mortgage.
The difference between the value of your home and any loans you have on the property are its equity. You have $150,000 of equity in your home. To access the equity, you take out a cash-out mortgage that replaces your original loan. Assuming you pay the closing costs out of pocket, the balance of your new mortgage is $160,000 (the balance of the old loan plus the cash you want to take out).
Are you ready to refinance your home? Run the numbers to see if refinancing is right for you.