What is a Cash-Out Refi (Refinance)?
In my last blog I covered home equity loans and HELOCs (home equity lines of credit). This blog will focus on cash-out refinancing or “cash-out refi” which is another type of mortgage refinancing.
The short definition: a cash-out refinance effectively pays out some of the equity in your home as cash—you emerge from the closing with a new mortgage and a check for cash!
For a more detailed description, a cash-out refinance is a mortgage refinancing option in which an old mortgage is replaced with a new one with a larger amount than was owed on the previously existing loan, helping borrowers use their home mortgage to get some cash. You usually pay a higher interest rate or more points on a cash-out refinance mortgage, compared to a rate-and-term refinance, in which a mortgage amount stays the same.
A lender will determine how much cash you can receive with a cash-out refinance, based on bank standards, your property’s loan-to-value ratio, and your credit profile. A lender will also assess the previous loan terms, the balance needed to pay off the previous loan, and your credit profile. The lender will then make an offer based on an underwriting analysis. The borrower gets a new loan that pays off their previous one and locks them into a new monthly installment plan.
Pros and cons of a cash-out refinance
The primary advantage of a cash-out refinance is that the borrower can realize some of their property’s value in cash. You are borrowing from yourself and the equity will then begin to replenish!
With a standard refinance, the borrower would never see any cash in hand, just a decrease to their monthly payments. A cash-out refinance can possibly go as high as an approximately 125% loan-to-value ratio. This means the refinance pays off what they owe, and then the borrower may be eligible for up to 125% of their home’s value. The amount above and beyond the mortgage payoff is issued in cash just like a personal loan.
On the other hand, cash-out refinances have some drawbacks. Compared to rate-and-term refinancing, cash-out loans usually come with higher interest rates and other costs, such as points. Cash-out loans are more complex than a rate-and-term and usually have higher underwriting standards. A high credit score and lower relative loan-to-value ratio can mitigate some concerns and help you get a more favorable deal.
If you have questions regarding this type of refinancing I am happy to answer them and also direct you to a preferred lender.
Beth Brake REALTOR® 214-769-2947
Positively impacting your life as you move toward your dreams.