Question:

What is a cash-out refinance?

Answer:

A cash-out refinance is a transaction which refinances one or more of your current obligations fully and you receive funds on top of that. A cash-out refinance is a new loan that will pay off your existing first mortgage fully and you will even receive additional cash. Normally, there is a single fee apart from closing costs associated with the cash-out refinance that comes out of your pocket and this is the appraisal.

With a cash-out refinance you don’t necessarily get higher interest, especially if you observe your LTV. If you want to have an 80 percent LTV on your home worth $200,000, trying to keep the cash-out within $160,000 will help avoid higher rates.

What is cash-out refinance usually used for?

Well, taking a cash-out refinance can be used to consolidate multiple expenses and debt into a single monthly payment, which greatly reduces your efforts and saves you thousands of cash in a year. Nevertheless, keep in mind that consolidating debts as credit cards into a cash-out refinance, you are securing them with your house. And while defaulting on credit cards usually does not endanger your house, with a cash-out to consolidate credit cards they will become a lien on your property.

A cash-out allows you to make use of the equity of your home on issues such as education and car expenses now without having to wait until you sell your home. A home equity loan is not the same as a cash-out refinance. The difference is that the cash-out replaces your home loan and does not come on top of it, unlike an equity loan.

Since you could be allowed a cash-out of up to 125% of the appraised value (apparently, within higher interest and depending on lender), you may consider investing it. This is another way that a cash-out comes handy - use it as active investment instead of having this money stuck in the house.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
Was this Mortgage QnA helpful?
Not at all
  • Currently 3/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Definitely
Add to this Answer

Mortgage QnA is not a common forum. We have special rules:

  • Post no questions here. To ask a question, click the Ask a Question link
  • We will not publish answers that include any form of advertising
  • Add your answer only if it will contrubute to the quality of this Mortgage QnA and help future readers
If you have trouble reading the code, click on the code itself to generate a new random code. Verification Code Above:
Bookmark and share this QnA: