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. A cash-out refinance is a mortgage refinance option that allows you to convert home equity into cash. A new mortgage is applied for more than your previous mortgage balance and the difference is paid to you in cash.
A cash-out refinance is a way to refinance your mortgage and borrow money at the same time. You refinance your mortgage and receive 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. A cash-out refinance provides a lump sum of cash at closing.
The cash comes from the accumulated value of your home. Interest rates are usually higher for a cashout refinance than for a non-cash loan, and it's a little harder to qualify. The money remaining after paying off your original mortgage is paid to you in the form of a check at closing. Cash-out refinance funds can be used however the borrower sees fit, but many generally use the money to pay for large expenses, such as medical or educational expenses, to consolidate debt, or as an emergency fund.
Before deciding to conduct cash-out refinancing, it's important to consider the pros and cons of cash-out refinancing. Cashout refinances are useful for a number of reasons, but the most notable have to do with interest rates. Both a cash out refinance and a home equity loan allow borrowers to take advantage of the net worth of their home, but there are some important differences. As mentioned above, cash-out refinancing allows you to apply for a new mortgage that is worth more than your current mortgage and receive the difference in cash.
That's different from a cash-out refinance, which replaces your current loan, so you only have one mortgage. And, even when mortgage rates rise, cash-out refinancing is often cheaper than other forms of lending, such as credit cards and personal loans. However, if you can get a lower interest rate with a cashout refinance and if you plan to stay in your home for the long term, refinancing will likely make more sense. A cash-out refinance is a loan option that allows buyers to replace an active mortgage with a new mortgage that has a value greater than the outstanding mortgage balance.
If you're not sure if a cash-out refinance makes sense for you, talk to a mortgage lender, broker, or financial advisor who can take a closer look at your finances and advise you on your options. A cash out refinance and a home equity loan are two different ways to access the equity of your home with a fixed interest rate. The right type of cash-out refinance loan for you will depend on your current mortgage and what you qualify for. But if you just want to refinance to get a lower interest rate, you'll use a cashless or “rate and term” refinance.
One of the big drawbacks of a cash-out refinance is that you pay the closing costs of the full loan amount.