A cash-out refinance is a method of refinancing your mortgage and simultaneously borrowing money. Essentially, you will receive a check upon closing when you refinance your mortgage. Your new mortgage balance will be increased by the amount of the check you receive, along with any closing fees that are added to the loan.

You can use the cash-out refinance proceeds for any purpose of your choice, without any restrictions. However, it’s important to keep in mind that there may be tax consequences. Some popular uses of the cash-out refinance funds include home repairs or improvements, paying off debts, covering education expenses, starting a business, or paying medical bills.

Cash-out refinancing combines refinancing and a home equity loan. It allows you to borrow money as you would with a home equity loan or line of credit (HELOC).

Cash-out refinancing and home equity

In order to be eligible for a cash-out refinance, you will need to have a certain level of equity in your home, which serves as the collateral for the loan.

Assuming your home is valued at $250,000 and you have a mortgage balance of $150,000, you have $100,000 in home equity, representing 40% of your home’s value.

When refinancing, it’s usually recommended to keep at least 20% equity (although some lenders may allow less). Therefore, you have $50,000 that you can borrow.

In order to borrow $50,000, you would need to get a new mortgage for $200,000 (which includes the $150,000 you already owe). You will receive a $50,000 check during the closing, but please note that this does not include closing costs, which are typically 3-6% of the loan amount and may be added to the mortgage.

Advantages of cash-out refinancing

• Refinancing your mortgage can be a cost-effective way to borrow money because the interest rates are usually lower than those on other types of debt. You can reduce the interest rate on those debts by using the funds to pay off debts like credit cards or a home equity loan.
• Compared to other types of debt that require repayment within 5-10 years, mortgage debt allows for a longer repayment period of up to 30 years. This can make it easier to manage your payments if you have a significant amount of debt.
• A cash-out refinance allows you to borrow money and lower your mortgage rate if market rates have decreased since you obtained your mortgage.
• If you itemize deductions, you may be able to deduct the interest paid on other debts by including them in your mortgage because mortgage interest is usually tax-deductible within certain limits.

You can deduct mortgage interest paid on loan principle up to $1 million for a couple ($500,000 single) if you use the funds to buy, build or improve a home. However, if you use the proceeds from a cash-out refinance for other purposes, such as education expenses or paying off credit cards, the IRS will consider it a home equity loan. In such a case, you can only deduct the interest on the first $100,000 borrowed by a couple ($50,000 single).

Understand All Aspects Before Deciding

An important aspect of cash-out refinancing is that the closing costs apply to the entire loan amount. For instance, if you have a mortgage balance of $150,000 and opt for a cash-out refinance to get an additional $50,000, you’ll have to pay closing costs of 3-6% for the entire $200,000.

If your goal is to borrow a significant amount or lower your mortgage rate, a cash-out refinance is a suitable option. However, if you require a smaller amount, it’s better to consider a home equity loan or line of credit (HELOC). There are plenty of loan options to consider, our loan officers work with you to help determine which loan product would fit best for your situation.

How Much Money You Can Get from A Cash-Out Refinance.

A cash-out refinance lets homeowners replace their current mortgage with a new one that has a higher value. The extra cash from the new mortgage can be used for any new projects. It’s a great way to tap into the built-up equity from the previous mortgage.

The maximum amount of money you can receive from a cash-out refinance depends on your credit score and the type of mortgage you have. Typically, lenders allow you to borrow up to 80% of your home’s value, but some may permit up to 85% for FHA-insured mortgages. To determine the amount of money you can borrow, you need to find out your home’s current value and your lender’s allowed percentage of home equity.

Frequently Asked Questions

What is a cash-out refinance loan?

In simpler terms, a cash-out refinance means getting a larger mortgage than your current one and then receiving the extra amount in cash.

How does refinancing a loan work?

Refinancing a loan means getting a new loan to replace your current loan. The new loan may have different terms such as a different interest rate, repayment period, or loan amount.

How long after refinance do I get the money?

After completing a cash-out refinance, it usually takes between 3 to 5 days for your funds to be disbursed.

How much cash-out can I get on a refinance?

The amount you are able to withdraw from your home equity usually ranges from 80-85 percent, however, this may vary depending on the type of loan and the particular lender you are working with.

Can you pull money out of your house?

It is possible to obtain funds by tapping into the equity of your home. A cash-out refinance may be a suitable option if you require money for significant expenses like home renovations or educational expenses.