What is a Cash-Out Refinance?

A cash-out refinance is a type of home refinance loan designed to allow people to get cash back, extracting some of the equity in the home to use however they want. Most commonly, people use a cash-out refinance to cover unexpected expenses or for an activity like debt consolidation. There are pros and cons to cash-out refinancing and it is important to weigh all the options when considering tapping into a home's equity to choose the best option for a given situation.

In a cash-out refinance, borrowers get a new mortgage to replace the existing mortgage. The new mortgage is in an amount higher than the balance owed on the original mortgage, with the excess going directly into the pocket of the borrower. This is in contrast with a home equity line of credit, a type of loan added to an original mortgage where the borrower ends up with two loans instead of one. The borrower can decide how much money is needed and apply for a mortgage of the appropriate size. Usually lenders will not agree to issue a loan in the amount of the total value of the home, as they want borrowers to retain some equity.

When people apply for a cash-out refinance, they will need to provide supporting documentation demonstrating their income, discussing any other existing loans, and providing proof that they will be able to afford the new mortgage. Borrowers will also be given loan disclosures to review. These disclosures provide important information about repayment terms, in addition to origination fees and other costs associated with the loan.

One thing to be aware of with a cash-out refinance is that the loan usually has a less favorable interest rate than a simple refinance, and the fees associated with the loan can be very high. People interested in accessing their home equity may want to get comparisons on different types of equity loans to find one suitable for their needs. It may be more cost effective to get a home equity line of credit or to pursue other lending options. Personnel at a bank can provide more information about the loan products available and how they work.

A concern with home equity loans like a cash-out refinance is that a borrower could end up owing more on a home than it is worth, or could have a mortgage payment too high to afford. Lenders attempt to limit these risks by refusing loans with terms they feel could endanger borrowers, but unexpected events like job loss and sudden declines in the real estate market can threaten a loan previously thought to be stable.