What is a Cash-Out Refinance?
Summary: A cash-out refinance allows a homeowner to replace their previous loan with a higher mortgage and receive the difference in cash. Homeowners need to hold more than 20% in home equity for a cash-out refinance.
Homeowners can replace their previous mortgage with a new one and cash-out the difference by taking advantage of the equity within their home. Cash-out refinances can get homeowners a lower interest rate—depending on the market—and a lower monthly payment. The money withdrawn from the home can be used to promote healthy financial situations such as a home renovation or debt consolidation.
Cash-out refinances are based on the equity in a home; therefore, a home appraisal is a crucial step in determining the value of the property. Once the appraisal is complete and financial information has been verified by the underwriter, the owner will then close on the refinance.
Different refinance lenders may have different requirements, but a theme across all is having at least 20% in home equity. Refinance lenders also cap the amount of home equity a homeowner can withdraw to 80%. Homeowners with a VA loan are the only exception and can withdraw up to 100%.
Here is an example:
|New Appraised Home Value||$250,000|
|80% of Home Value (New Maximum Mortgage Amount)||$250,000 x 80% = $200,000|
|Cash-Out Monetary Fund = Maximum Mortgage Amount – Current Mortgage||$200,000 – $150,000 = $50,000|
The homeowner from our example above can withdraw up to $50,000 before closing costs and fees are applied. However, homeowners are advised to only withdraw how much is needed and not the entire amount offered.
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