What Is a Cash-Out Refinance?

A cash-out refinance is a mortgage refinancing option that lets you convert 澳洲幸运5开奖号码历史查询:home equity into cash. With a cash-out refinance, you take out a larger mortgage loan, use the proceeds to pay off your existing mortgage and rec🌺eive the remaining funds as a lump sum. You can use the funds from a cash-out refinance for anything, including debt consolidation or a major purchase.

A cash-out refinance can be an option if you have built up equity in your home from paying down your mortgage or if your home value has increased. The new loan from a cash-out refinance may come with a different 澳洲幸运5开奖号码历史查询:interest rate and loan term. However, please use caution since a cash-out refinance increases your monthly payment and mortgage loan balance.

How a Cash-Out Refinance Works

A cash-out refinance allows you to use your home as 澳洲幸运5开奖号码历史查询:collateral for a new loan, creating a new mortgage for a larger amount than currently owed. The new mortgage pa🐓ys off your previous, smaller mortgage balance, and you get paid the difference in cash.

With a 澳洲幸运5开奖号码历史查询:standard refinance, the borrower would never see any cash in hand. 澳洲幸运5开奖号码历史查询:Refinancing is a popular process for replacing an existing mortgage with a new one that extends more favorable terms to the borrower. Refinancing a mortgage can help you lower your 澳洲幸运5开奖号码历史查询:interest rate, decrease your monthly 澳洲幸运5开奖号码历史查询:mortgage payments, shorten or extend 🐻the loan's term, and remove or add borrowers.

However, a cash-out refinance increases your loan balance and monthly payment since you're withdrawing your home's equity to access cash at the loan's closing.

Determine Your Cash Needs

The funds from a cash-out refinance can be used as the borrower sees fit, but many typically use the money to pay for big expenses such as medical or educational fees, to 澳洲幸运5开奖号码历史查询:consolidate debt, or as an 澳洲幸运5开奖号码历史查询:emergency fund.

Getting cash by using the equity in your home can be an easy way to get funds for emergencies, expenses, 澳洲幸运5开奖号码历史查询:debt consolidation, and purchases. However, it's important to determine your cash needs since borrowing a large amount translates to 澳洲幸运5开奖号码历史查询:more debt and a higher payment. With a cash-out 澳洲幸运5开奖号码历史查询:refinance, you need to balance the need for cash with your ability to repay a larger mortgage loan.

Find a Lender

Borrowers should seek out a 澳洲幸运5开奖号码历史查询:cash-out refinance lender willing to work with them. The lender assesses the current mortgage’s terms, the balance needed to pay off the loan, and the borrower’s credit profile. The lender makes an offer 澳洲幸运5开奖号码历史查询:based on an underwriting analysis. The borrower gets a new loan that pays off their previous one and locks them into a new monthly installment plan. The amount above and beyond the mortgage payoff gets paid to the borrower in cash.

Less Equity

A cash-out refinance results in less equity in your home and a larger mortgage loan balance. As a result, the lender is taking on an increased risk, potentially leading to higher 澳洲幸运5开奖号码历史查询:closing costs, fees, or interest rate 澳洲幸运5开奖号码历史查询:than a standard refinance. Borrowers with specialty mortgages like U.S. 🌊澳洲幸运5开奖号码历史查询:Department of Veterans Affairs (VA) loans, including cash-out loans, can often be refinanced through more favorable terms with lower fees and rates than non-VA loans.

Pros and Cons of a Cash-Out Refinance

A cash-out refinance can offer many benefits to homeowners. However, it's important to evaluate the pros and cons and weigh the benefits of converting equity into cash with the risks associated with taking out a new mortgage loan.

Pros

澳洲幸运5开奖号码历史查询: Lower Interest Rate

The cash-out refinance gives the borrower all of the benefits of a standard refinance, including a potentially lower rate and other beneficial modifications🍰. Savvy investors who monitor interest rates over time typically jump at the chance to refi🗹nance when mortgage rates have fallen.

Improve Your Finances and Credit

If the funds from the cash-out refinance are used to pay off 澳洲幸运5开奖号码历史查询:credit card debt or 澳洲幸运5开奖号码历史查询:personal loans, borrowers can save money on the debt servicing costs due to the mortgage loan's lower interest rate. Also, your finances can improve if the new loan consolidates debt, reducing the number of loan and credit card payments. As a result, you might improve your 澳洲幸运5开奖号码历史查询:credit score.

Money for Purchase or Debt Consolidation

Borrowers can use the funds from a cash-out refinance to pay down 澳洲幸运5开奖号码历史查询:high-rate debt or fund a large purchase. This option can be particularly beneficial when rates are low or in times of crisis—such as in 2020–21, in the wake of global lockdowns and quarantines, when lower payments and some extra cash may have been very helpful.

Cons

Closing Costs and Fees

There can be a variety of different types of refinancing options, but in general, 澳洲幸运5开奖号码历史查询:most will come with several ad🌠ded costs and fees that make the timing of a mortgage loan refinancing just as important as the 澳洲幸运5开奖号码历史查询:decision to refinance.

Higher Debt and Monthly Payments

Consider why you need the cash to ensure that refinancing is your best option. A 澳洲幸运5开奖号码历史查询:cash-out refinance may come with a lower interest rate than borrowing via 澳洲幸运5开奖号码历史查询:unsecured debt, like 澳洲幸运5开奖号码历史查询:credit cards or 澳洲幸运5开奖号码历史查询:personal loans. However, you're taking out a larger mortgage loan with higher monthly payments unless you increase the lo🌊an♉'s term length. You must have the financial viability to make the payments for many years.

Risk of Losing Your Home

Unlike a credit card or 澳洲幸运5开奖号码历史查询:personal loan, with a cash-out 澳洲幸运5开奖号码历史查询:refinance, you risk losing your home if you 澳洲幸运5开奖号码历史查询:can’t repay the mortgage. Carefully consider whether the cash you withdraw from 𓂃your home's equity is worth the risk of losing your home if you can’t keep up with pay⛄ments in the future.

For example, if your home's value decreases, you could end up 澳洲幸运5开奖号码历史查询:underwater on your mortgage, meaning you owe more than the house is worth. If you experience job loss or a decreased income, your new, higher monthly payment might become unaffordable. If you fall behind in your payments and default on the loan, the lender could 澳洲幸运5开奖号码历史查询:foreclose on the property, repossess the home, and resell it.

Example of a Cash-Out Refinance

Say you took out a $200,000 mortgage to buy a property worth $300,000, and after many years, you still owe $100,000. Assuming the property value has remained at $300,000, you have $200,000 in home equity. If rates have fallen and you are looking to refinance, you could poten💫tially get approved for up to 80% of the equity in your home.

Loan-to-value of 80%

Let’s say your lender will lend y𝐆ou 80% of your home’s value. Your cash-out refinance would have the following financial details:

• New loan: $240,000 ($300,000 home value * .80 loan-to-value)

The loan proceeds would be divided as:

• Take $100,000 and pay off the existing mortgage loan balance
• Receive $140,000 as a lump-sum cash payment

As a result, the new mortgage loan of $240,000 would consist of the $100,000 from the original loan's remaining balance plus the $140,000 you received as cash.

Loan-to-value of 50%

Let’s say that although your lender will lend you 80% of your hom🐻e’s value, you only want $50,000. Your cash-out refinance would have the following fin🌊ancial details:

• New loan: $150,000 ($300,000 home value * .50 loan-to-value)

The loan proceeds would be divided as:

• Take $100,000 and pay off the existing mortgage loan balance
• Receive $50,000 as a lump-sum cash payment

As a result, the new mortgage loan of $150,000 would consist of the $100,000 from the original loan's remaining balance plus the $50,000 you received as cash.

The disadvantage of the cash-out 澳洲幸运5开奖号码历史查询:refinance includes the new lien on your home for the larger mortgage loan balance since it includes the original loan amount and the cash amount. However, you don't need to take on the added risk and higher mortgage loan payments at an 80% loan-to-value. You can opt for a lower lump-sum payment, which can help ensure you can repay the loan.

Rate-and-Term vs. Cash-Out Refinance

Borrowers have a variety of options when it comes to refinancing. The most basic mortgage loan refinance is rate-and-term refinance, also called 澳洲幸运5开奖号码历史查询:no cash-out refinancing. With this type, you are attempting to attain a lower interest rate or adjust the term of your ✤loan, but nothing else changes on your mortgage.

For example, if your property was purchased years ago when rates were higher, you might find it advantageous to refinance to take advantage of lower interest rates. In addition, variables may have changed in your life, 澳洲幸运5开奖号码历史查询:allowingꦰ you to ✤handle a 15-year mortgage, saving on the loan's total interest but forgoing the lower monthly payments of your 30-year mortgage. In other words, with a rate-and-term 澳洲幸运5开奖号码历史查询:refinance, nothing else changes, just the rate and term.

Cash-out refinancing has a different goal. You receive the difference between the two loans in tax-free cash. This is possible because you only owe the lending institution the original mortgage amount. Any extraneous loan amount from the refinanced, cash-out mortgage is paid to you in cash at closing, which is generally 45 to 60 days from when you apply.

Compared to rate-and-term, cash-out loans usually come with higher interest rates and other costs, such as points. Cash-out loans are more complex than a rate-and-term and usually face more extensive underwriting standards. A high credit score and a lower relative 澳洲幸运5开奖号码历史查询:loan-to-value (LTV) ratio can mitigate some concerns and help you get a more favorable deal.

Cash-Out Refinance vs. Home Equity Loan

With a cash-out refinance, you pay off your current mortgage and enter into a new one. With a home equity loan, you are taking out a 澳洲幸运5开奖号码历史查询:second mortgage in addition to your original one, meaning you now have two liens on your property. This could translate to hav🧔ing two separate creditors, each with a possible claim on your home.

Closing costs on a home equity loan are generally less than tho✅se for a ℱcash-out refinance. Home equity credit can be advantageous if you need a substantial sum for a specific purpose. However, the refinance might make sense if you can get a lower interest rate with a cash-out refinance—and if you plan to stay in your home long-term. In both 𝔍cases, make sure you can repay the new, higher loan amount because otherwise, you could lose your home if you default on the payments.

The Bottom Line

Refinancing replaces an existing mortgage with a new one that presumably has better terms for the borrower. On the other hand, a cash-out refinance allows the borrower to convert home equity into cash. With a 澳洲幸运5开奖号码历史查询:cash-out refinance, the borrower takes out a new mortgage for more than the previous loan, uses the funds💝 to repay the old loan, and receives a lump sum cash payme♛nt for the remaining funds. As a result, a cash-out refinance increases your monthly payment and mortgage loan debt—please consider carefully.