What Is a Cash-Out Refinance?

By Rae Oakley, Flyhomes Mortgage

Are you looking to tap into your home’s equity to accomplish financial goals? Then you might consider a cash-out refinance. Similar to a regular rate and term refinance, you’ll apply for and close on a new mortgage with a new rate that you’ll pay back over a new term … except with cash out, you’ll walk away with a certain amount of cash that you get to use as you see fit.

How a cash-out refi works
Take the value of your home, subtract the outstanding principal balance on your mortgage, and you’re left with the amount of equity in your home. When you apply for a cash-out refinance, you’ll qualify to receive some of that equity as cash. Mortgage companies typically require leaving behind 15-20% of your equity in the home to reduce financial risk.

For example, say you own a home valued at $550,000, and your mortgage balance is at $400,000. Your equity in the home is $150,000 ($550,000 – $400,000). 

To estimate how much cash you could take out, subtract 20% of your home’s value: $150,000 – ($550,000 * 20%) = $40,000. Assuming your lender requires 20% equity to be left in your home, you might qualify for about $40,000 with a cash-out refinance!

The benefits of a cash-out refi
A cash-out refi is based on your first mortgage rather than a separate loan or line of credit. Typically, this means you’ll get a better interest rate because your lender gets first lien position on your title. First position means that your lender will get paid out first in the event that you default on your home. 

In a lender’s eyes, this reduces risk, which allows them to quote you a lower interest rate. This is great for you, because it also means you might be able to qualify for more cash out than if you went with a HELOC or Home Equity Loan.

What’s more, for those looking to keep things simple, a cash-out refi means you only have one monthly payment for your mortgage, which can certainly help with budgeting and keeping your finances organized.  

Summing it up
Cash-out refis work best if you:
– Have a sizable amount of equity in your home that will allow you to accomplish your financial goal
– Want to consolidate debts, renovate, or invest elsewhere at a relatively lower interest rate
– Want to only have one mortgage payment

Not sure if a cash-out refi is the way to go? Learn about other ways to unlock equity.

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