A cash-out refinance allows the borrower to access a portion of the equity accumulated in the home as cash. A cash-out refi gives you access to the equity in your home. Here, you refinance your existing mortgage into a new one with a larger outstanding principal balance, and pocket the difference. The amount of cash you receive is generally based on the difference between your home’s current value and the remaining balance on the loan, but other factors such as occupancy, whether it is a single-family residence, the loan-to-value ratio, whether there is a second loan on the property, etc. come into play.
For example, if your home is valued at $250,000 and you owe $150,000, the amount of equity you’ve built up is $100,000. If you need $50,000, your new mortgage amount will be based on the total amount you owe plus the cash you receive, or $200,000.
Homeowners choose to cash out their home’s equity for a variety of reasons, often to help pay for major expenses. Here are some of the most common uses:
Yes, in most cases your payment will increase. Since your new loan will consist of your original balance plus the desired cash amount, you can expect the loan and payment size to go up in exchange for cold hard cash.
The cash-out refinancing process may sound confusing, but a little refi know-how goes a long way. Take a look at our Refinance Resources hub for more information.