What Is A Cash-Out Refinance?

A cash-out refinance lets you tap into your home’s equity for cash you can use for any purpose you choose. Unlike a home equity loan or line of credit, which results in a second mortgage on your home, the cash-out refinance replaces your current first mortgage. The new loan amount equals the balance of the original loan plus the additional amount you draw against your equity.

Who Should Consider a Cash-Out Refinance?

A cash-out loan may be a good choice under certain conditions. For example, if your current mortgage has a higher interest rate than you qualify for. And, you need a one-time cash infusion for a significant expense. This loan type also appeals to borrowers who prefer predictable payments. Because cash-out refinance loans typically have fixed interest rates, your payment amount stays the same over the entire term of the loan.

Additionally, a cash-out can be taken out of second homes and investment properties. In fact, many customers take the equity out of one investment property for the down payment on another investment property.

Potential Drawbacks

Although you can save on interest if the new loan has a lower rate, if the new loan’s rate is higher, you’ll pay that additional interest amount on both your current balance and the additional amount you borrow. Also, you’ll pay more fees on a cash-out refinance than you’d pay with a home equity loan or line of credit. Note, too, that lenders often cap the loan amount at 80 percent of the home’s value, so the amount of equity you can draw is more limited than it might be with a home-equity loan or line of credit.

Finally, some states have specific rules and regulations in place for a cash-out refinance.  Joel can walk you through the various steps in order to successfully take equity out of your home.

Weighing Your Options

An online amortizing mortgage calculator can help you verify that a cash-out refinance makes sense for you. Enter the loan amount, the loan term (length) and the interest rate, and compare what your new payment will be against your current payment. Run the numbers for your lender’s home-equity offerings as well. Remember to factor in such loan costs as an appraisal, origination fee and closing fees.