What is Cash Out Refinancing?
A cash-out refinance represents a choice to replace the current home loan with a new one that will have a higher loan amount than what is presently owed on the existing mortgage.
This makes it possible for the homeowner to get access to equity that can be used to consolidate higher interest debts, home improvement, or to satisfy other costs. Your property must have sufficient money available to do a cash-out refinance.
A rate and term refinance on the other hand just pays off an existing mortgage with no additional money back to the borrower.
How does a cash out refinance work?
• Enables the borrower to utilize the home’s equity and obtain money for other needs.
• May come with a slightly higher interest rate due to more lender risk. However, if you originally bought your home with a high interest rate a cash-out refinance can still provide you with a lower overall payment.
• Cash-out loans are usually limited to 80 percent of the home’s value.
Refinancing Mortgage Cash out Definition
The equity in the home is established by today’s appraised value of the home less the balance of the mortgage. For every mortgage payment that is made, your mortgage balance is reduced and your home’s equity goes up.
An additional factor is if other similar homes in the area start building equity it begins to increase the value on your home’s value as well.
Cash out refinance advantages and disadvantages
There are a couple of drawbacks that pertain to fees included in a cash-out refinance, such as loan points and closing costs. Typically, a cash-out refinance comes with a higher interest rate or fee versus a traditional mortgage due to the added risk to the Lender.
Some of the advantages are being able to roll closing costs into the new loan or no origination fee refinance loans offered by some lenders.
Cash Out Refinance compared to Home Equity Loan
Home Equity Loans generally have lower fees but the interest rate is higher and tends to be due in 10- to -15 years. Moreover, home equity loans can feature a variable interest rate or offer an interest only payment option. Each of these features has their own set of respective pluses and minuses.
When you are trying to weigh these aspects, it’s recommended that you contact a local Loan Originator to find out more.
How Does a Cash-Out Refinance match up against a Home Equity Loan (HELOC)?
HELOCs may be perfect for homeowners who simply need access to a specific amount of money periodically rather than receiving the entire lump sum in advance.
Scott is a Business Development Manager at 1stNWM. He blogs about home loans, personal finance and lives in Orange County, CA. He feels good about sharing his expertise and real world stories of successful real estate transactions. when he’s not at work, he is with his bestie, a four-legged furry and often sloberring Saint Bernard, Wyatt.