Cash-Out Refinance: How it works and when to use it. July 17
A cash-out refinance is a type of refinance of an existing mortgage that is structured in such as way that you walk away from the refinance with extra spending money in your pocket. For example, if you have lots of accumulated equity in your home that you would like to gain access to – but you don’t want to sell your home in order to capture the appreciated value – you can use a cash-out refinance to tap into it.
Here’s how it works:
Let’s say that you owe $100,000 on your current mortgage, but your property is worth $300,000. You can borrow $200,000 with a cash-out refinance, pay off the existing mortgage, and still have another $100,000 left over to do with as you please. This concept works whenever your property has equity that is sufficiently more than the amount you owe on your mortgage, and the borrowing limits are based upon your lender’s loan to value (LTV) criteria and your own specific financial goals and needs. If you have good credit, most lenders will let you borrow up to 70 percent or more of the appraised value of your property, and this offers extreme flexibility for those who need to convert equity into cash. You can do it without the sacrifice of selling your home and moving to a new residence, and then you can spend the extra money for whatever you want, from credit card payoffs to college tuition or that trip to Europe you’ve been promising your spouse.
A cash-out can also be used to switch out of a more expensive ARM loan when rates on conventional 30-year loans are more attractive. Use the extra money you borrow to pay all of your closing costs, and you won’t have to rob the piggy bank to pay for points and legal fees but can come away from the closing table without any out of pocket expenses.