Cash-Out Refinance
Candlefocus EditorRefinancing a home means taking out a new mortgage to pay off an existing mortgage loan. It’s important to know that there are two options when refinancing: rate-and-term and cash-out. With a rate-and-term refinance, the amount owed on the existing loan is simply switched to the new loan and no additional funds are given. On the other hand, cash-out refinance isn’t as straightforward but is thought of as a ‘cash advance’ as your debt is effectively replaced with an amount greater than what you owe.
A Cash-Out Refinance is generally a smart move for homeowners who have equity accumulated in the property. After all, when the mortgage is paid off, the remaining value of the home is equal to the equity that has built up over time. The amount of money that can be borrowed through a cash-out refinance depends on how much equity the borrower has and the loan-to-value (LTV) ratio of the home. The LTV is the loan amount’s percentage of the value of the home after the cash-out refinance. Generally, it can range anywhere between 80 and 95% of the home’s value, depending on the lender, but a typical LTV would be 90%. This means if the home is valued at $300,000, a Cash-Out Refinance of up to $270,000 could be taken.
Keep in mind, lenders will require an appraisal on the home to verify that its worth is still greater than the amount taken. Any borrower sourcing a Cash-Out Refinance should review their budget carefully, as it often comes with higher fees and interest rates than a traditional rate-and-term mortgage, in addition to having to cover closing costs. But it is still a great option for many homeowners if used with caution and knowledge. Cash-out refinance is a great tool for responsibly tapping into the equity of your home and securing your financial freedom.