Cash-Out Refinancing Basics
What is cash-out refinancing?
Cash-out refinancing takes advantage of your home’s equity – the part of your home that you already own. Let’s say your home is worth $150,000 and you owe $100,000 on the mortgage: you have $50,000 in equity. With cash-out refinancing you can put some of that equity to use by taking out a loan for more than you currently owe and pocketing the difference. So in this example, you could potentially refinance the $100,000 you currently owe on your mortgage to a new $125,000 loan. This would give you $25,000 “cash” to use as you wish.
What is cash-out refinancing good for?
The check you get from a cash-out refinance can be spent on anything for which you need a large sum of money: home improvement, tuition, debt repayment or a down-payment for another property, for example. Depending on when you got your first mortgage, you may even be able to get a better interest rate when you refinance, which could help offset the rise in monthly payments you may experience as a result of your new, higher loan amount.
How does it work?
Any kind of refinancing is basically just trading in your old mortgage for a new one with different features and options: a new interest rate, a different term (how long you have to pay off the balance), a new loan amount. With cash-out refinancing, you take out a mortgage for more than you currently owe, and the lender gives you a check for the difference.
In general, lenders will let you finance up to 100% of your home’s value if you have excellent credit. Be aware, though, that if you owe less than 80% of your home’s value before you refinance, you’ll need to factor in the cost of private mortgage insurance (usually about 0.5 percent of the loan amount).
What’s the difference between cash-out refinancing and a home equity loan?
A refinance is a replacement of your old mortgage; a home equity loan is a second loan on top of your mortgage. A home equity loan might be a good option if interest rates are higher now than when you got your mortgage, or if you plan to repay the equity part fairly quickly.
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