Cash-Out Refinance: Explained

Imagine your dream kitchen, spa-like bathroom oasis, or perfect backyard. Or envision paying off debt, sending your kids to college free of student loan debt, finally taking that vacation, or having money to invest and build wealth. Now, picture having available funds to transform your vision into reality – without having to dip into your hard-earned savings. And no, you don’t have to win the lottery to access cash to lead the life you’ve always wanted… A cash-out refinance may be the solution you’ve been waiting for!

How a Cash-Out Refinance Works
A cash-out refinance is a loan type where you essentially “cash in” your home equity for cash in your pocket. Generally, this loan type replaces an existing mortgage with a loan amount that’s more than the current mortgage loan. You receive the difference between the two loans (i.e., home equity) in cash at closing. Keep in mind that you most likely won’t be able to take out 100% of your home’s equity – the max LTV (loan-to-value ratio) is usually 80%.

Types of Cash-Out Refinances
Just like a mortgage for a home purchase, there are many different loan types to choose for a cash-out refinance, including FHA, VA, conventional, and jumbo loans. With both conventional and FHA loans, you are required to leave at least 20% equity in your home after a refinance. With a VA loan refinance, you can cash out all the home equity.
Additionally, and again, like a mortgage intended for a home purchase, there’s a process from the time of application to closing, including underwriting, processing, and approvals. Keep in mind that closings costs, other fees, and appraisals are all a part of cash-out refinance loans as well.

Pros and Cons of a Cash-Out Refinance
As with any decision, especially a major financial decision like a cash-out refinance, weighing the pros and cons helps you understand if it’s a good fit for you.

Pros to Consider

• Interest rates are typically lower than HELOCs and personal loans
• There’s a variety of loan types to choose from
• The mortgage interest may be tax-deductible
• The cash from your home equity can be used for nearly anything you want

Cons to Consider

• A cash-out refinance will likely extend the repayment time of your mortgage
• Closing costs and origination fees are expenses to consider
• If your interest rate on your current mortgage is lower than what you could qualify for with a cash-out refinance, you could have a higher interest rate loan, paying more every month