In today’s red hot real estate market, refinancing a mortgage is a popular way for homeowners to take advantage of lower interest rates and tap into the growing equity in their home.
Essentially, you take out a new loan to pay off and replace your existing loan. An increasingly popular option is refinancing your mortgage with cash out.
Here’s how refinancing a mortgage with cash out works:
What is refinancing a mortgage with cash out?
Refinancing a mortgage with cash out is the same as refinancing a mortgage with one key difference: borrowers take out more than the total amount owed on the property and accept the difference in cash.
If you owe $200,000 on your home and refinance to owe $220,000, you would then take the $20,000 in cash (minus fees and closing costs).
How is refinancing a mortgage with cash out possible?
When you refinance a mortgage, you are buying out your old loan and replacing it with a new one. In this case, you are simply buying out the loan and then replacing it with one for a slightly higher amount. This is possible because a) you have already paid off a portion of your home and b) the equity in your home has grown since your initial purchase.
What are the benefits of refinancing my mortgage with cash out?
In addition to the benefits associated with home loan refinancing in general (lower rates, shorter-term, etc.), a cash-out refinance gives you money that you can spend immediately. This can be used to fund home repairs or pay off credit card debt.
Cash-out refinancing is most beneficial when interest rates are low.
How much cash can I actually get?
This depends on the specifics of your situation and is up to your lender.
What’s the difference between cash-out refinancing and a home equity loan?
Cash-out refinancing is rolled into your new, refinanced mortgage, while home equity loans and home equity lines of credit exist on top of your current mortgage. Cash-out refinancing is more expensive but less risky – you have one creditor rather than two.
What are the downsides to cash-out refinancing?
The benefits of putting cash in your wallet are obvious, but cash-out mortgage refinancing isn’t the right option for everyone. Compared to rate and term refinancing, the interest rate offered on cash-out refinancing loans is typically going to be higher, and the closing costs are higher than those associated with home equity loans.
If you don’t need the money immediately, rate and term refinancing is probably a better option. If you have to pay for something like a major housing repair, medical surgery, or high-interest credit card debt, refinancing your mortgage with cash out gives you the short-term financial flexibility you need.