A cash-out refinance is a type of mortgage refinance that takes advantage of the capital you have accumulated over time and gives you cash in exchange for purchasing a larger mortgage. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and you keep the difference. Cashout refinancing gives you a lump sum when you close your refinance loan. Loan proceeds are first used to pay off your existing mortgages, including closing costs and any prepaid items (for example, real estate taxes or homeowners insurance); all remaining funds are paid to you.
Cashout refinancing is when you apply for a loan that is worth more than your original mortgage. You use the loan to pay off the original mortgage, and the remaining money is yours to do however you want. You can borrow up to 80% of your home's net worth. A cash-out refinance is a way to refinance your mortgage and borrow money at the same time.
You refinance your mortgage and get a check at closing. The balance due on your new mortgage will be greater than the previous one by the amount of that check, plus the closing costs included in the loan. If you have a significant amount of equity in your home and would like to convert that equity into real money that you can use, a cash-out refinance may be convenient for you. Lenders that offer loans insured by the Federal Housing Administration (FHA) sometimes offer an FHA cash refinance that allows you to borrow up to 85 percent of the value of your home.
If you are looking to lower the interest rate on your current mortgage or change the term of the loan, then you should opt for a refinance without withdrawing money. Both a cash out refinance and a home equity loan allow borrowers to leverage the net worth of their home, but there are some important differences. One of the big drawbacks of a cash-out refinance is that you pay the closing costs of the full loan amount. Keep this in mind if you plan to use the cash-out refinance loan (or secured debt) to consolidate unsecured debt, such as credit cards.
Typically, a traditional cash-out refinance has closing costs that can amount to hundreds or even thousands of dollars. You can only deduct interest on a cash-out refinance loan if you used that loan to pay for home improvements that increase the value of the home, i. The difference is that a cash-out refinance transforms your first mortgage into a new mortgage, whereas a home equity loan is a second mortgage, separate from the original. You choose not to receive any additional money and the lower loan balance gives you a lower monthly payment than a refinance with limited cash out.
While a cash-out refinance replaces your current mortgage with new terms, a home equity loan can be an additional fixed-rate loan. Expect to pay 3 to 5 percent of the new loan amount for closing costs to perform a cash out refinance. The difference in cash between the old mortgage and the new mortgage is withdrawn and can be used for any other major project the homeowner wants. If you use a cash out refinance to pay off credit card debt, you'll have more credit available on the card, but remember that you still owe the same total amount or a little more if you fund your closing costs.
There are no restrictions on how to use the proceeds from a cash out refinance; you can use it for any purpose you want (although there may be tax consequences, see below). Let's take a deeper look at the benefits and drawbacks of cash-out refinancing, so you can decide if it's the smart thing for you. .