Cash-Out Property
In the real estate world, refinancing is the process of replacing an existing mortgage with a new one that typically extends more-favorable terms to the borrower. By refinancing your mortgage, you may be able to decrease your monthly mortgage payments, negotiate a lower interest rate, renegotiate the number of years—or term—of the loan, remove other borrowers from the loan obligation, or access cash through home equity that has built up over time.
KEY TAKEAWAYS
In a cash-out refinance, a new mortgage is for more than your previous mortgage balance, and the difference is paid to you in cash.
You usually pay a higher interest rate or more points on a cash-out refinance mortgage, compared to a rate-and-term refinance, in which your mortgage amount stays the same.
Depending on your property’s loan-to-value ratio, the lender will set a maximum on how much cash you can take out when refinancing.
Rate-and-Term vs. Cash-Out Refinancing
The most basic mortgage loan refinance is the rate-and-term. With this type, you are attempting to attain a lower interest rate and/or adjust the term of your loan. For example, if your property was purchased years ago when rates were higher, you might find it advantageous to refinance in order to take advantage of lower interest rates that now exist. In addition, variables may have changed in your life allowing you to handle a 15-year mortgage (saving massively on interest payments), even though it means giving up the lower monthly payments of your 30-year mortgage.
Cash-out refinancing has a different goal. It allows you to convert home equity into cash by creating a new mortgage for a larger amount than what is currently owed. You receive the difference between the two loans in tax-free cash (the government does not count the money as income). This is possible because you only owe the lending institution what is left on the original mortgage amount. The additional loan amount of the refinanced, cash-out mortgage is paid to you in cash at closing, which is generally 45 to 60 days from the time you apply.
Compared to rate-and-term, cash-out loans usually come with higher interest rates or other costs, such as points. Lenders are worried that if you have already taken out substantial equity, you might be more likely to walk out on the new loan, though a high credit score and low loan-to-value ratio (LTV) can allay those concerns and help you get a favorable deal.
