Home Ownership

What Are Cash-Out Refinances?

Most homeowners have an idea of what refinancing means, but many may not realize that there are different ways to refinance a home. A cash-out refinance is a popular option, but its goal differs from a standard rate and term refinance. During a cash-out refinance, a new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash. With a cash-out refinance, you can use the funds from your home’s equity to pay off debt (like credit cards), renovate your home, or take any other expenses out of the equation—all while potentially getting more favorable loan terms.

What is a Cash-Out Refinance?

A cash-out refinance is a home loan where you take out cash using the equity in your home. This can pay off other debts, help you make home improvements, or even give you extra money for a rainy day.

What’s the difference between a cash-out refinance and a rate and term refinance? 

With a standard refinance, homeowners aim to lower their interest rates or adjust the term of their loan, without getting cash or making other changes to the mortgage. With a cash-out refinance, homeowners receive the difference between the two loans mentioned above in cash. 

With cash-out refinances, you usually pay a higher interest rate or more points on a refinance mortgage compared to a standard home equity loan. 

A lender will determine how much cash you can receive, based on your property’s loan-to-value (LTV) ratio and your credit.

To qualify for a cash-out refinance, you must meet the equity requirements set by lenders. In addition, if you have already applied for another loan with a different lender (such as an auto loan), this will affect your ability to borrow additional funds if any issues need resolving, such as credit card debt or liens on personal property, before getting approved.

What Are The Benefits Of A Cash-Out Refinance?

Get The Cash You Need For Home Renovations

Because cash-out refinances do not put limitations on what you can use the funds for, it gives homeowners more flexibility. Homeowners can fund a new swimming pool, add an addition to their home, or com, completely remodel their kitchen. The options are endless!

You Can Use The Money To Pay Off Other Debts

While there are some costs associated with a cash-out refinance, such as closing fees and title insurance (the amount varies based on where you live), most people who take out these loans find them worthwhile because they can use the funds to pay off other high-interest debts. 

Are There Any Disadvantages To A Cash-Out Refinance?

The main disadvantage to a cash-out refinance is that you will have to pay closing costs. Other disadvantages include:

  • There could be a higher interest rate on your new loan
  • Repaying the loan over a more extended period could mean paying more overall

How Do I Know If A Cash-Out Refinance Is Right For Me?

Before you go through the process of getting a cash-out to refinance, make sure it's right for your needs. This means you should be:

  • Looking for a lower interest rate on your mortgage
  • Wanting to use the extra cash for home improvements, including adding an addition or renovating rooms

Cash-out refinancing could be a great way to lower your interest rate while giving you the money you need for home renovations.

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Bottom Line

A cash-out refinance is when a borrower takes out additional debt by using their home as collateral, also known as re-borrowing against it. In addition to potentially lowering their interest rates, homeowners can use their cash to pay off high-interest credit card debt or buy furniture or appliances. If they don't have any big purchases in mind but want lower payments, they can choose not to withdraw any funds during this step—they will just get a lower interest rate on their new loan by refinancing into a shorter term with less money owed overall.

If you're thinking about getting a cash-out to refinance, the most important thing to remember is that this type of loan isn't right for everyone; it depends on your financial needs and goals.

Learn how to apply for a loan or refinance your current one with Military Homespot Lending. Click here for the details.