Cashout refinancing is a mortgage refinance option that allows you to convert home equity into cash. It involves taking out a new loan for more than your existing mortgage balance and receiving the difference in cash at closing. This type of loan can be beneficial if you need money for a major purchase or expense, or if you want to take advantage of a lower interest rate than what you currently have. When you close your refinance loan, you will receive a lump sum of money.
The 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. The right type of cash-out refinance loan for you will depend on your current mortgage and what you qualify for. Cashout refinancing rates can be between 0.125% and 0.5% higher than rates for cashless refinancing.
A home equity loan is often a better option than a cash-out refinance if you don't want to modify your current mortgage, perhaps because you already have an ultra-low interest rate, or because you're close to paying off the original loan. When considering a cash-out refinance, it's important to compare and find the best refinance offer. You may be able to get a lower interest rate and a larger loan amount than with a personal loan or other alternative. However, these rates can be up to 0.5% higher than a traditional mortgage refinance, as you are taking advantage of the net worth of your home.
In addition, applying for another 30-year loan or refinancing at a higher interest rate could mean you pay more in total interest. Cashout refinancing allows you to access your home's equity and get cash at closing. Existing home mortgage and property liens are canceled and replaced with a new mortgage. The new mortgage is applied for more than your previous mortgage balance and the difference is paid to you in cash. Cash from a cash-out refinance can be used for virtually any purpose, such as remodeling your home, consolidating high-interest debt, or other financial goals. For conventional cash-out refinancing, you can apply for a new loan for up to 80% of the value of your home. In the real estate world, refinancing in general is a popular process to replace an existing mortgage with a new one that generally extends terms to the borrower that are more favorable.
Cashout refinancing replaces your current mortgage loan with a larger mortgage, allowing you to take advantage of the accumulated value in your home and access the difference between the two mortgages (current and new) in cash.