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What Is A Cash Out Refinance?

By Ann White

A cash-out refinance is a new mortgage for a value equal to the original balance of the original, taken out to turn equity into cash.

Traditionally, borrowers refinance a mortgage to take advantage of low interest rates, or to modify the terms of the original mortgage. These loans do not need to be any higher than the existing balance of the refinanced mortgage, as they are used only to gain more advantageous terms for the remainder of the mortgage term. A cash-out refinance is a similar process with several key differences.

Differences

Instead of a refinance loan for the balance of the existing mortgage, a cash-out refinance is taken out for the total balance of the original mortgage. As an example, a $100,000 balance on a $200,000 mortgage would typically be refinanced for $100,000 because that is the total principle that needs to be modified. A cash-out refinance would generally be for the full $200,000. It is not necessary that a cash-out refinance be for the full value of the original loan, though this is what is most frequently understood by the phrase.

Motivation

Why would a borrower refinance for more than they currently owe? The answer is straightforward: the borrower wants to convert their equity in their home into cash. In the example above, the borrower would have access to $100,000 in cash and would effectively restart their mortgage from the beginning. This method may be preferable to options such as a home equity line of credit, as it enables a borrower to take advantage of better loan terms and no concerns about interest rates for the line of credit. It also enables access to a larger sum faster than a home equity line of credit. Borrowers requiring large sums less than the difference between their equity and the original principle balance could refinance for smaller amounts to turn their equity into cash as necessary.

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3. Are Mortgage Interest Rates Higher For A Cash Out Refinance?
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5. Can A Home Refinance Loan Give You The Cash You Need?