What is a cash-out refinance?

Ready to refinance but don’t know where to start? Reviewing the different types of refinances can be stressful. We’re here to help! Figuring out your goals is a great place to start. Are you looking to bring your monthly payments down? Do you need cash to meet your financial goals? Is it time for the home improvement project you’ve been wanting to start? We’re talking about a very popular refinance option here, the cash-out refinance.

You may choose to do a traditional refinance when rates are lower than when you first bought your home. A cash-out refinance allows you to use the equity in your home to your advantage. You’ll have the freedom to use the cash however you want.

A cash-out refinance replaces existing mortgages on a property, plus potentially provides cash back at closing. Because the loan amount is typically higher than what you currently owe, the difference between the cost of the transaction and your current loan is paid to you in cash. Your home equity, or the value of your home above what you owe, gives you the ability to complete a cash-out refinance.

You may be able to save money on your monthly payments, which could help you meet financial goals like consolidating or paying off debt or making home improvements.

The process for a cash-out refinance is similar to a traditional refinance. Here’s more information about the refinance process in general. Refinances always involve a new loan with new terms, but a cash-out refinance lets you take cash out of the equity (value) that’s accrued in your home.

Cash-out refinances:

• Let you take cash out of your home equity to use however you want
• Give you the difference between what you owe and your home’s value
• Provide the option to refinance and borrow money in one transaction
• Limit the cash-out amount based on your home equity
• Provide an option to consolidate a first and second mortgage*
• May have higher loan amounts and interest rates

Keep in mind that the new loan still includes costs like an appraisal, title, recording and insurance fees as well as closing costs. You may be able to wrap closing costs in the new mortgage. We can help you go over these options to decide if this is the best way forward. Use our refinance calculator here to help crunch the numbers for your specific situation.

With any loan, it’s important to review the benefits and potential risks involved. Let’s look at some key things to keep in mind.

• You’ll have new loan terms: A cash-out refinance involves new loan terms that are different from those included with your original purchase loan. The interest rates on your new loan may change.
• You may be able to meet other financial goals.** If your credit cards have higher interest rates, you might be able to use funds from your cash-out refinance to pay those balances down or pay them off completely. Paying down debt can also help to build your credit score.
• Options for home improvements: Using your home equity to add onto your home or remodel is a smart option. You’re using your home’s value to increase the value, which increases the worth of your investment in the long run. Tax deductions may apply to a cash-out refinance if funds are used to add onto or improve your home.*
• Opportunity to pay off a second mortgage: A second mortgage comes with a completely separate mortgage payment. With a cash-out refinance, you may have the option to pay off a second mortgage with the equity in your home.

• Fees and closing costs: New loans include new fees just like any other purchase or refinance. Title and insurance, appraisal or potential recording fees may apply. Closing costs vary but it’s important to make sure the savings is worth it long term.
• Interest rates: A cash-out refinance may involve a higher interest rate, but this isn’t always the case. If mortgage rates were much higher when you originally purchased your home, you may be able to take cash out and secure a new loan with a lower interest rate.

A cash-out refinance may be the best option for you, especially if you’re looking to pay off debt or finally start that dream kitchen or home office remodel.  Our refinance guide has helpful information as you decide to move forward. It’s important to make sure the benefits outweigh the risks for your family. We’re here to help. If you have questions, we’re ready to review the details of your unique situation and start this journey. Our local loan officers can work with you directly. Contact us today!

*Typically, a non-purchase second mortgage

**Please consult your financial advisor on the consolidation of short term debt into long term debt.