Cash-Out Refinances

Have you ever heard of a cash-out refinance? If you haven’t yet, you’re sure to hear a friend or two chatting about them soon. Rates have continued to drop since the beginning of 2020 meaning many people are opting to refinance their mortgage.

What is a cash-out refinance?

This type of refinance that allows homeowners to leverage their home’s equity for cash. Unlike other refinances, your loan amount actually increases instead of remaining the same.

For example, let’s say you own a $200,000 home and only have $100,000 left to pay on your mortgage. That means you have $100,000 in equity. Say you need $25,000 in cash. If you did a cash-out refinance for the amount, you would have $25,000 in cash and $125,000 left to pay on your mortgage.

However, before you start dreaming of taking out all of your home’s equity in cash, there are limits. Most lenders limit cash-out refinances to 80-90% of the home’s equity.

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What are the costs?

If you’re a homeowner in need of cash, a cash-out refinance sounds like a dream come true. But before you set your sights on this type of refinance, we need to discuss the costs. Depending on your refinance, you may have to pay closing costs which can account for $2,000-3,000.

What do people use them for?

The majority of borrowers use cash-out refinances to either pay off debt or make home improvements. With this type of refinance, it’s important to consider the cost of the refinance against the value gained from withdrawing the cash.

For instance, it might make sense to pay off a high-interest credit card with a cash-out refinance. To determine if this would be in your best interest financially, you would need to do the math of whether the interest on your credit card would amount to more than the closing costs and interest on your cash-out refinance.