Cash-Out Refinance

Written by RateText Team Updated over a week ago

Making the decision to refinance your house is a big one, but it’s often the right one. Especially when you have the option of accessing much lower interest rates, better loan terms, and the equity in your home. But, refinancing comes with a load of paperwork and, hopefully, a load of research before you feel comfortable making the leap. At Lending Studios, we want to make researching your refinancing options as easy as possible. That’s why we make access to tools and resources simple. The refinancing process may be complex, but finding out whether it’s the right option for you should be fairly simple.

As you likely already know, there’s a wide selection of loan options available. You can access a 15-year refinance or renew your 30-year with a new loan at better interest rates. You can access quick perks through streamline refinance options, or you can keep your equity in your home and start aggressively paying down the principal. However, depending on your specific circumstances, you may also be able to access a cash-out refinance.

What is a Cash-Out Refinance?

Just like every other type of refinancing, a cash-out refinance replaces your current mortgage with a new loan. However, it does this by creating a new mortgage that’s higher than your current outstanding loan balance. This allows you to be able to withdraw the difference between the two mortgages in cash and put that money toward whatever you’d like. This money can be used for home remodeling and increasing the value of your home, consolidating high interest debt like your student loans, or accomplishing other goals for your financial future.

Essentially, this allows you to pull out a portion of your home equity in a large sum. However, lenders usually only allow you to withdraw no more than 80% of the total value of your home. This is to ensure that you still have an equity cushion that keeps you financially protected in the future.

How to Gain Equity to Withdraw

A cash-out refinance requires that you have equity in your house, at least to a degree. So, the next natural question is “How do I get equity?” However, it’s not a simple answer. In general, you can gain equity in your home in two ways: the home increases in value and you pay down your mortgage principal. To gain equity through mortgage payments, you’ll have to be a fair way through your initial mortgage on the home to have much equity invested. For your home to increase in value, you can alter this through home improvements or by getting lucky in the area you buy in.

Because one of the main ways of adding equity and value to your home means large renovations, many folks turn to cash-out refinancing to pursue those opportunities. When your loan is approved and your refinance is put down in print, you can do anything you want with the cash you get from the new loan. This money is taken from the equity in your home, so for lots of people, it makes sense to put it back into the home in one way or another. However, if you’re struggling with a new ailment that requires lots of income to go straight to hospital bills or you’re trying to find money to help your child pay for college, this can be a good way to access those funds as well. It’s also a great way to pay off credit card debt. If you’re stuck under seemingly insurmountable credit debt, it could be an easy solution to trade that high interest debt for a lower interest debt by drawing out the cash to pay it off with a cash-out home refinance.

Indeed, there are many reasons why and many benefits to cash-out refinance options. After all, there’s a reason so many people refinance their homes to access the cash, the lower interest rates and other benefits from refinancing.

The Ups & Downs of Cash-Out Refinancing

Benefits of Cash-Out Refinance

Potential Downsides to Cash-Out Refinance

The Potential Benefits

The Potential Downsides