What does "Cash-out refinance" mean?

Definition

A cash-out refinance is a way to borrow against your home's equity. You replace your current mortgage with a larger one and receive the difference in cash, all while keeping a single monthly payment.

Understanding Cash-Out Refinance

Cash-out refinance typically appears when homeowners want to use the equity in their home. It involves replacing the existing mortgage with a new one, borrowing more than what you owe. The extra amount comes to you as cash. Example: If your home is worth $300,000 and you owe $200,000, refinancing for $250,000 gives you $50,000 in cash. It's not the same as a home equity loan, which is a separate loan on top of your existing mortgage. Cash-out refinance combines your old loan and the new cash amount into one loan.

People Want To Know

Is a cash-out refi a good idea?

A cash-out refinance can be beneficial if you need funds for major expenses like home improvements or debt consolidation. However, it increases your mortgage balance and may lead to higher monthly payments or a longer repayment term. Weigh the advantages against potential risks, such as fluctuating interest rates and the impact on your equity.

Is it hard to qualify for a cash-out refinance?

Approval depends on your credit score, debt-to-income ratio, and home equity. Requirements vary by lender. Contact lenders to discuss your specific situation and determine if you qualify.

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More From The Mortgage Glossary

Closing

Closing is the final stage of buying a home. It's when you sign the legal documents and transfer the funds to officially take ownership of the property.

Closing costs

Closing costs are the fees you pay to a lender to finalize your mortgage. These typically range from 3% to 6% of the loan amount and cover things like appraisal fees, title insurance, and other administrative expenses.

Closing Disclosure

A Closing Disclosure is a five-page document that provides the final details of your loan. It lists your interest rate, monthly payment, and all closing costs, and you must receive it at least three business days before closing.