What is a Cash Out Refinance?

Home owners constantly have to think about maintenance, updates, and repairs. This keeps their houses in good condition, and in turn, helps increase their property values.

Yet, repairs, updates, and maintenance aren’t cheap. So when it’s time to pump additional money into your house, you need a practical way to get your hands on the cash.

Some home owners finance home improvement projects with a credit card, whereas others use money in their savings account. Depending on how much equity you have, though, there’s likely an option you haven’t considered.

Getting a cash out refinance can also provide needed funds to take care of your property. But this isn’t the only use for funds. You can use a cash-out refinance to consolidate debt*, pay for college, finance a wedding, or even start a business.

Here’s what you need to know about this option to determine if it’s the right move for you.

What is a cash-out refinance?

Before we get into the definition of a cash out refinance, it’s important to have a clear understanding of a mortgage refinance.

Mortgage refinancing is the process of applying for a new home loan to replace an existing home loan. Home borrowers refinance for various reasons. Some people want to get a lower mortgage rate, others want to adjust the terms of their mortgage, and others — maybe you—use refinancing as a way to tap the equity in their home.

So a cash out refinance involves applying for a new mortgage loan, and in the process, borrowing cash from your equity. Of course, this isn’t the only way to tap your equity. Some homeowners also take advantage of home equity loans and home equity lines of credit.

Both options create a second mortgage, and for some people, these home equity solutions make more sense. But if you’re looking to get cash from your equity and modify the terms of your mortgage, refinancing with a cash out option is a better fit.

How much can you borrow with a cash out refinance?

If you’re thinking about a cash out refinance, you might wonder: how much can I borrow from my equity? Realistically, you’re not able to borrow 100% of your home’s value. In most cases, though, you can refinance and receive up to 80% of your home’s value—which is likely enough. So, if your home is worth $500,000 and your current mortgage has a balance of $200,000, you are sitting on $300,000 in equity. In this scenario, if you borrowed 80% of the value of your home as a cash-out refi, you’d have a new loan balance of $400,000 and access to $200,000 of your equity.**

Of course, this is the maximum you can receive—you don’t have to borrow this much. With a cash-out refinance, it’s important to only borrow what you need, and nothing more.

How to get a cash out refinance?

Not only does a cash out refinance require sufficient home equity, you must qualify for the new mortgage loan. This means submitting a home loan application, having your credit pulled, providing proof of income, and having your loan file reviewed by an underwriter.

Having an existing mortgage loan DOES NOT automatically qualify you for a mortgage refinance. So if you’re unemployed or having credit problems, now might not be the best to refinance. It’s probably better to postpone refinancing until your credit score and income improve.

How does a cash out refinance affect your mortgage balance?

Yes, you’re borrowing from your own equity. But this doesn’t mean that you don’t repay a cash out refinance.

These are borrowed funds, so getting a cash out refinance will increase your current home loan balance. And as a result, your monthly mortgage payment could increase, depending on how much you borrow. This is why it’s important to only borrow what you need. This way, you’ll avoid payment shock.

Of course, getting a cash out refinance doesn’t always mean a higher monthly payment. If you’ve been paying down your mortgage loan for many years and then decide to borrow from your equity, there’s a chance that your new mortgage balance will be less than your original balance. And if so, you might be able to get cash from your equity without your mortgage payment increasing.

Bottom Line

Whether you’re looking to consolidate debt, make home improvements or handle another large expense, a cash out refinance is an opportunity to tap your equity, get your hands on much-needed funds, and modify your mortgage terms.

To learn more about cash out refinancing and other equity options, give the experts at Blue Spot Home Loans a call or fill out the contact form today.

Cherry Creek Mortgage Co., Inc. NMLS #3001, dba Blue Spot Home Loans. This material is informational only and not an advertisement to extend credit as defined by TILA/Regulation Z nor an application for credit as defined by RESPA/Regulation X. All applications are subject to underwriting approval and determining applicant’s ability to repay. Not all applicants are eligible for or qualify for all loan products offered. All loan programs, terms and conditions are subject to change without notice. Rates and terms are valid as of the date of printing/distribution. *Debt consolidation does not pay off the debt, please consult a financial advisor regarding the effect of consolidating short-term debt into long-term debt. **These terms are for illustration only. The exact amount of equity you’d be able to access would be impacted by your closing costs and fees.