What Is a Cash-Out Refinance?
As your mortgage matures, you accumulate equity in your home. Equity represents the portion of your home's value that you've paid off or gained. There are two primary ways to build equity:
Cash-Out Refinance
A cash-out refinance is a type of mortgage refinancing that capitalizes on the equity you've accrued over time by providing you with cash in exchange for assuming a larger mortgage. In essence, with a cash-out refinance, you borrow more than your current mortgage balance and receive the excess funds.
Unlike obtaining a second mortgage, a cash-out refinance doesn't introduce an additional monthly payment; instead, you retire your existing mortgage and replace it with a new one.
When you refinance, you have flexibility in how you utilize the cash derived from your equity. Whether it's making property repairs, catching up on student loan payments, or covering unexpected expenses like medical or auto repairs, cash-out refinances offer access to lower interest rates compared to many other lending options, such as credit cards. If you require extra funds to cover various expenses, a cash-out refinance can be an attractive option.
Cash-Out Refinance Example
Consider a scenario where you initially purchased a home for $200,000 and have paid off $60,000 of the mortgage. This leaves you with an outstanding balance of $140,000. Now, suppose you're looking to undertake $20,000 worth of renovations.
With a cash-out refinance, you tap into a portion of your equity and add the withdrawn amount to your new mortgage principal. This results in a new mortgage of $160,000, which comprises the original $140,000 owed on the home plus the $20,000 for renovations. Following the closing, your mortgage lender disburses the $20,000 in cash to you within a few days.