A cash-out refinance loan is a great refinance option for borrowers looking to convert their home equity into cash. A cash-out refinance replaces a borrowers’ current mortgage with a larger loan and uses the home’s equity to provide additional funds for other purposes.
For example: A homeowner who owes $50,000 on a home valued at $250,000 has $200,000 in equity. A cash-out refinance would liquidate some of the equity by refinancing with a new loan amount greater than $50,000. The additional funds on this loan (after fees and closing costs) would be given to the borrower in cash.
A cash-out refinance differs from a home equity loan because a refinance replaces the current loan with a larger one, where a home equity loan is an additional loan (subordinate to your first mortgage). Interest rates are typically lower on a cash-out refinance than a home equity loan.
Both FHA and conventional loan programs allow the cash-out refinance option. FHA allows cash-out refinance on primary residence only, and conventional allows it for all occupancy types. In addition to the loan program requirements, cash-out refinance loans also require:
Additional fees may also be required based on a borrowers’ loan-to-value.
There are many reasons borrowers opt for a cash-out refinance. Some of these include:
It’s smart to look at your current mortgage and mortgage rates. Are rates higher now than when you initially got your mortgage? Are you close to paying off your mortgage? If so, a cash-out refinance may not be the best option for you.
Additionally, it’s smart to consider your current financial situation. The total amount of equity a borrower is allowed to withdraw in a cash-out refinance is based on factors including the value of the home and the borrowers’ current financial situation. Borrowers with a higher credit score, less debt and a higher home equity are likely to pay smaller closing fees than those with a poor credit score and low equity.
Lastly, if you do decide to get a cash-out refinance, pay close attention to the housing market and be smart about the amount of equity you choose to withdraw. Borrowers can run the risk of going underwater on their mortgage if their home price declines – taking out too much equity and having a home’s real estate value drop can be a crippling combination.
That being said, cash-out refinancing is a great option for borrowers who have high interest rates, or are looking for funds to make significant home improvements or consolidate debt.
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