Cash-Out Refinancing: An Overview

cash out refinance

If you’re looking to refinance your mortgage, there are different options available for you to choose from. One option is cash-out refinancing. Cash-out refinancing allows homeowners to tap into the equity of their home and get cash back in return. This is done by refinancing your home with a loan larger than your existing one.

Here’s an example to help illustrate a cash-out refi scenario:

Let’s say you own a home valued at $350,000 and owe $250,000 on the existing mortgage. This means you’ve built $100,000 in equity. Now, if you wish to refinance, you can take out some amount of money in equity. Let’s say you want to take out $50,000. Your new loan now totals $300,000, based on what you already owned and the equity you took from it.

Why Go with a Cash-Out Refinance?

People opt for cash-out refinance for many reasons, one of the most popular being home improvement. Improving your home with new construction projects is a reliable way to build more value on your home.

You could also opt for a cash-out refinance to cover certain expenses. It could be for an emergency, college tuition, car loans, or even a vacation. It’s your money, spend it as you wish!

Another option is to use a cash-out refinance to improve your credit. This is accomplished by paying down any high-interest credit card debt, which can help you cut back on monthly interest spending. By reducing high interest debt, your credit score will increase. This is typically a one-time boost, and should not be done too often.

Restrictions on Cash-Out Refinancing

Like any loan, there are restrictions on who can and cannot apply for a cash-out refinance. Although it varies by lender, there are minimum credit score policies that block certain applicants from being considered. Additionally, in order to qualify for a cash-out refinance one must typically have owned the home for more than one year and have a Loan-to-Value ratio of 85% or more.

Cost of Cash-Out Refinancing

A cash-out refinance has costs comparable to those associated with a traditional refinance. Closing costs, for example, could run up to a few thousand dollars depending on your lender. Additionally, you’ll be required to pay interest on the cash that you take out.