Cash-Out Refinance

A cash-out refinance is a mortgage refinance option that allows you to turn home ownership into cash. A new mortgage is taken out with more than the balance of the previous mortgage, and the difference is paid to you in cash.

In the real estate world, refinancing is a generally common process of replacing an existing mortgage with a new mortgage that is usually extended to a more suitable borrower. By refinancing your mortgage, you may be able to lower your monthly mortgage payments, negotiate a lower interest rate, renegotiate periodic loan terms, remove or add borrowers from your loan obligation and, in the case of refinancing in cash, cash from the equity in your home.

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With cash refinancing, a new mortgage is taken out with more than the balance of the previous mortgage, and the difference is paid to you in cash.

You typically pay a higher interest rate or more points for a cash-out refinance mortgage than a rate-and-term refinance because the mortgage amount stays the same.

The lender will determine how much cash you can get through a cash-out refinance, based on criteria such as the loan-to-value (LTV) ratio of your property and your credit profile.

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How does a cash-out refinance work?

A cash-out refinance allows you to use your home as collateral for a new loan, as well as some cash, creating a new mortgage for an amount greater than what is currently owed. Getting cash using the equity in your home can be an easy way to pay for emergencies, expenses and needs.

Borrowers looking for a cash out refinance find a lender willing to work with them. The lender evaluates the current mortgage terms, the balance required to repay the loan and the borrower's credit profile. The lender makes an offer based on the underwriting analysis. The borrower receives a new loan that pays off his previous loan and credits it in a new monthly installment. The amount that exceeds the mortgage payment is issued in cash.

With a standard refinance, the borrower will never see cash in hand, just a drop in their monthly payments. The funds from a cash-out refinance can be used as the borrower sees fit, but the money is often used to pay major expenses such as medical or educational fees, for debt consolidation, or as an emergency fund.

A cash-out refinance results in a lower percentage of the equity in your home, which means the lender is taking on more risk. As a result, closing costs, fees or interest rates may be higher than a standard refinance. Borrowers with specialty mortgages, such as VA loans, including cash-out loans, can often be refinanced through more favorable terms with lower fees and rates than non-VA loans.

Lenders impose borrowing limits on the amount you can borrow with a cash-out refinance — typically 80% of your home's available equity.

The pros and cons of cash out refinancing

Smart investors who track interest rates over time usually take advantage of the opportunity to refinance when loan rates fall to new lows. There may be different refinancing options, but in general, most of them will have many additional costs and fees that make the timing of the mortgage loan refinance as important as the decision to refinance.

In addition to checking rates and fees to make sure refinancing is a good option, consider the reasons why you need cash. This refinancing option usually comes with lower interest rates than unsecured debt, such as credit cards or personal loans. However, unlike a credit card or personal loan, you run the risk of losing your home—for example, if you can't make your mortgage payments, or if your home's value declines and you end up underwater because of your mortgage.

Carefully consider whether the money you need is worth the risk of losing your home if you can't keep up with future payments. If you need money to pay off consumer debt, take the steps you need to control your spending so you don't get trapped in an endless cycle of debt overload. The Consumer Financial Protection Bureau (CFPB) has a number of great guides to help determine if refinancing is a good option for you.

A cash-out refinance gives the borrower all the benefits they seek from a standard refinance, including a lower rate and other potentially beneficial adjustments. Borrowers also receive their own cash that mo