What Is A Cash-Out Refinance?

A cash-out refinance lets you tap into your home’s equity for cash you can use for most purposes 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 loan term.

Additionally, a cash-out can be taken out of second homes and investment properties. 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 on both your current balance and the additional amount you borrow. Also, you’ll pay more fees on a cash-out refinance than 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 for a cash-out refinance.  Joel can walk you through the various steps to take equity out of your home successfully.

Weighing Your Options

An online amortizing mortgage calculator can help verify that a cash-out refinance makes sense. Enter the loan amount, the loan term (length), and the interest rate, and compare your new payment 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.

(*Limited purposes allowed for cash-out refinances in Texas unless it is home equity.)