A cash refinance is a way to replace your current mortgage with a new, larger loan, which pays you the difference between the amount borrowed and what you owe on the home. This process, known as cashout refinancing, gives you a lump sum when you close your refinance loan. The loan proceeds are first used to pay off your existing mortgages, including closing costs and any prepaid items (such as real estate taxes or homeowners insurance). The remaining funds are then 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 with as you please. You can borrow up to 80% of your home's net worth. 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.
It's important to ask yourself if a cash-out refinance is more than just a short-term solution to a general problem. Typically, a traditional cash-out refinance has closing costs that can amount to hundreds or even thousands of dollars. A home equity loan, such as a cash out refinance, provides you with a lump sum of up to 80% of your home's net worth. A home equity loan, on the other hand, is a second mortgage that doesn't replace your first mortgage and can sometimes have a higher interest rate compared to a cash-out refinance.
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. Let's say refinancing your current mortgage means you can get a lower interest rate and you'll use the cash to renovate your kitchen and bathrooms. Your interest rate and term could also change with a cash out refund, but the idea is to borrow more than you currently owe and use the extra cash for something else. As noted, cash-out refinancing involves applying for a new loan for a larger amount, canceling the existing one, and obtaining the difference in cash.
A cash-out refinance, like any other refinance, will come with a number of closing fees and costs to consider. Cash-out refinances are great ways to use the capital accumulated during the previous mortgage term. It's important to consider both the benefits and drawbacks of cash-out refinancing before deciding if it's right for you. Keep in mind that if you plan to use the cash-out refinance loan (or secured debt) to consolidate unsecured debt, such as credit cards, then you may not be able to deduct interest on it.
Additionally, if you use the new mortgage to pay for home improvements that increase the value of the home, then you may be able to deduct interest on it.