How Does a Cash-Out Home Refinance Work?

Cash-Out Home Refinance Guide

Read Time: 3 Minutes

Money sack, clay house, and coin jar sitting on counter

Money can’t buy happiness. But it can go towards home improvements – or help you consolidate high-interest debt, which would make you pretty happy, right? Good news: If you have a mortgage and enough home equity, you may be able to get the cash you need to do these things – or anything you want! How? By cash-out refinancing.

What is a Cash-Out Refinance?

A cash-out refinance lets you turn your home’s equity into – you guessed it – cash. Simply put, it’s a loan that replaces your current loan in an amount that includes what you still owe, plus the cash from your home equity you want to take out.

How Much Can I Cash-Out?

For example, say you have a $400,000 mortgage and so far, you’ve paid off $250,000, leaving an unpaid balance of $150,000. If you need $100,000, your new mortgage loan amount will be $250,000. That’s $150,000 for the remaining balance, and $100,000 for the equity you’re accessing. Keep in mind that you most likely won’t be able to take out 100% of your home’s equity – the max LTV (loan-to-value ratio) is usually 80%.

What Can I Use a Cash-Out Refinance For?

Anything! It’s yours. However, since you’re going to be paying the money back, it’s wise to use it for worthwhile investments, such as home improvements. This adds value to your home, so you may be able to get more for it when it comes time to sell. As the saying goes, “You have to spend money to make money.”

Other common practical uses for this money include consolidating high-interest credit card debt, which could help boost your credit score. You could also invest in your child or grandchild’s future by using it for college tuition. However, you can use it however you like! Just make sure that you can keep up with your new payments.

When I Do a Cash-Out Refinance, When and How Do I Receive the Funds?

Typically, you’ll receive the funds in a lump sum at closing. However, if you have a rescission period, which gives you time after closing to rescind the loan, you’ll wait until the end of that period to get your cash.

What Do I Need For a Cash-Out Refinance?

Just like a regular purchase/refinance, you’ll most likely need to provide the following paperwork:

  • W-2s/tax returns
  • Pay Stubs
  • Bank Statements
  • Credit Report (usually a credit score of at least 580)

You may also need other paperwork, depending on your situation and lender. Additionally, it’s important to note that you’ll be responsible for closing costs, and any other type of fees you incur.

Getting cash-out home refinance can be a smart move if you need cash and have built some equity. Plus, rates are currently near historic lows, but could be rising soon, making it an opportunistic time to refinance. . If you’re ready to access your home’s equity with a cash-out refinance, you can apply for a mortgage online today.


Related Articles:

Is a Cash-Out Refinance Right for You?

10 Frequently Asked Cash-Out Refinance Questions Answered

How to Add Curbside Appeal on a Tight Budget

The 5 Benefits of a Cash-Out Home Refinance


Newrez is not a financial advisor and the ideas outlined above are for informational purposes only. They are not intended as investment or financial advice and should not be construed as such. Consult a financial advisor before making decisions regarding important personal financial matters, and consult a tax advisor regarding the deductibility of interest and tax implications.



Related Articles

Wood house with FHA LOAN carving READ ARTICLE
House figurine with "INSURANCE" speech bubble READ ARTICLE
Military father and child watching the sunset and flying a US flag READ ARTICLE