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What Is a Cash-Out Refinance?
In Cash-Out refinance, you refinance an existing mortgage loan, where the new mortgage loan is larger than the existing mortgage loan, and you (the borrower) obtain the difference between the two loans in cash. Usually, homeowners opt for cash out refinancing so they can convert some of the equity they’ve accumulated in their home into cash.
How does Cash-Out Refinance work?
Traditional refinancing, however, tends to replace your existing mortgage with a new one for the same balance. Here’s how a cash-out refinancing works:
- You get paid with the difference between the mortgage balance and the value of the house.
- It has a slightly higher rate of interest due to a higher loan amount.
- Cash-Out is limited to 80% to 90% of the equity in your home.
In other words, you can’t pull out 100% of your home’s equity. If your home is valued at $200,000 and your mortgage balance is $100,000, you have $100,000 of equity in your home. You can refinance your $100,000 loan balance for $150,000, and receive $50,000 in cash at closing to pay for home development, maintenance or renovation.
Who should go for Cash-Out Refinance?
Cash-out refinancing is a sensible option if you can get a good interest rate on the new loan and have a sound use of the money. But it is a bad idea if you’re seeking refinancing to fund a vacation or a new car, as there’s no return on your money. On the other hand, using the money to finance a home renovation can rebuild capital that you are taking out; use it to consolidate debt which puts you in a stronger financial position.
Here you’re using your home as collateral for a cash-out refinance, therefore it is important to make full and timely payments on your new loan.
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