Everything You Need to Know About Cash-Out Refinancing

Cash-out refinancing is a great way to access the equity of your home and use it for large expenses, such as medical or educational costs, debt consolidation, or an emergency fund. It involves taking out a new mortgage that is worth more than your current mortgage and receiving the difference in cash. Interest rates are usually higher for cash-out refinancing than for non-cash loans, and it's a little harder to qualify. Before deciding to conduct cash-out refinancing, it's important to consider the pros and cons of this option. 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.

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. When you close your refinance loan, you receive a lump sum. The money comes from the accumulated value of your home. If you can get a lower interest rate with a cash-out refinance and if you plan to stay in your home for the long term, refinancing will likely make more sense. However, 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. However, even when mortgage rates rise, cash-out refinancing is often cheaper than other forms of lending, such as credit cards and personal loans.

Miriam Rosebrook
Miriam Rosebrook

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