Cash out refinancing is a type of mortgage refinance loan that allows you to take advantage of part of your home's equity if you need additional money. It pays off your first existing mortgage and replaces it with a new, larger mortgage. The difference between the old mortgage and the new mortgage is paid to you in cash, which you can use however you want. Cash out refinancing can be a great way to consolidate debt, finance home renovations, or pay for other significant expenses.
If your mortgage is backed by the Department of Veterans Affairs (VA), you may be able to borrow up to 100% of your equity with a cash refinance from the VA. However, if you don't put in at least 20% when buying a home or don't have at least 20% equity after a cash out refinance, you will have to pay an additional cost called Private Mortgage Insurance (PMI). An appraisal is required to assess the current value of your home before a cash out refinance can be approved. This is because the amount you can borrow with a cash-out refinance depends on the accumulated value of your home.
Cash out refinancing is different from rate-and-term refinancing, also known as cashless refinancing. Rate-and-term refinancing does not involve taking out any additional money from your home's equity. If you're looking to leverage your home equity and withdraw money to finance major personal or housing projects, then a cash-out refinance is ideal. It can also be an easy way to get emergency funds if financing is not available or is more expensive than a mortgage rate.
However, if you use cash for a major purchase or expense, it's important to consider the risks involved in taking out secured debt to pay off unsecured debt. Home Equity Loans and Home Equity Lines of Credit (HELOC) are alternatives to refinancing mortgages with retirement or non-cash out (or rate and term). However, a HELOC and a cash-out refinance are similar in that they both use the equity of your home as collateral, so failure to pay could result in foreclosure.