When it comes to buying a home, cash-out refinancing is an attractive option for many homeowners. A cash-out refinance is a type of mortgage loan that allows you to access the equity in your home and receive a lump sum of cash in return. This type of loan can provide you with a number of financial benefits, such as consolidating high-interest debt, investing in real estate, or covering closing costs. In addition, cash-out refinancing can be more affordable than taking out a personal loan or a second mortgage.
When you decide to take out a cash-out refinance, you will need to apply for a new mortgage loan that is larger than your existing mortgage balance. The difference between the two loans is the amount of cash you withdraw from your total home equity. You may be required to pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, where the mortgage amount stays the same. The cash-out refinancing process is similar to the process you undergo when you buy a home.
Once you know you qualify, choose a lender, submit an application and documentation for the underwriting, get an approval, and wait for your check. 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. There are no restrictions on the use of withdrawn cash. You can use it for virtually any purpose, such as remodeling your home, consolidating high-interest debt, or other financial goals.
Some borrowers plan to use part of their cash out to cover closing costs, but this has the same net effect as shifting costs to the new loan. If you are an investor, you can use cash from refinancing your primary residence to buy more real estate, such as rental or investment property. When they want to reinvest, they do a cash refinance of their existing investment property to buy another. The result is a solid collection of rentals that produce continuous income and tend to hold their value historically. Compared to high-interest credit cards, it may be more affordable to access the cash you need with a cashout refinance. A cash-out refinance can also help you diversify your holdings or protect against a crash in the housing market.
If you have an existing business or a new business, a cash-out refinance can serve as a cheap source of emergency capital. The amount of equity you have in your home is an important factor in how much cash you will be able to access with a cash out refinance. Loan-to-value limits and other factors in loan approval determine the amount of cash that can be drawn from the equity of any property. After you request a cash-out refinance, you receive a decision on whether your lender approves the refinance. Like a cash-out refinance, a home equity line of credit (HELOC) allows you to withdraw cash from your home equity. With a cash offer on the table, the buying and selling process is a little different than it would be with a mortgage involved.