What is a cash-out refinance?

Question

Ive looked up what a cash-out refinance is and everything I read or watch goes right over my head. If someone would be kind enough to give me a thorough and simple overview of what a cash-out refinance is and when and when not to use that would be much appreciated.

Best,

Liam

Best,

Liam

Alex Hunt · Answer

Hey Liam,

A cash-out refinance is when you take out a new, larger mortgage that pays off your existing mortgage and gives you extra cash. Typically most lender label it a "Cash out" when you walk away with more than $5,000 dollars.

Typically lenders will provide you 75% of the total value of the home in a loan.

For sake of example lets pretend closing costs are not included.

Home value: $200,000
Remaining loan amount: $20,000
Refinance loan amount: $150,000 (75% of $200,000)
Cash-Out: $130,000 ($150,000 - $20,000)

Feel free to send me a DM with any questions or if you would like to chat on the phone.

Erik Estrada · Answer

You are basically just getting a new loan with a higher balance. You still own the property no matter what. You just owe more on it with a cash out.

You are making payments on the new higher loan. This loan will release you from your original one. So say your rate was at 5% at $150k balance, and your new balance is $200k at 6%, you would be paying the full payment on the new balance.

Liam Marshall · Answer

So after you pay off your first loan can you explain to me the terms of this new loan. So assuming rates are the same would I be getting $150,000 and pay off the rest of my first loan? Do I now own my house in full since I payed off my loan? Am I now making Monthly payments on my $150,000 loan? Theres a large chance I'm overcomplicating this in my head but I'm still a bit confused.

Erik Estrada · Answer

Hey Liam,

A cash out refinance is basically you, borrowing against the equity of the property.

Say your property is worth $500k and your balance is $150k. Lenders will allow you to borrow up to 75% of the property's appraised value.

That would be a new loan of $375,000. Subtracting your mortgage balance of $150k + $15k for estimated closing fees, You'd net about $210,000 at closing.

You pay principal and interest on the new balance of $375k, which would result in higher payments. You also restart the amortization schedule, so It would be like hitting reset on paying off your mortgage.

Doing a Cash Out can make sense if you plan to invest that $210k into other real estate or to consolidate high credit card debt.

River Sava · Answer

Hey Liam - Happy to run some numbers for you if you have a specific property in mind

Rachel K Reiman · Answer

Thankyou

Angel Cabrera · Answer

Lets say your house is worth $200K

And you currently only owe $100K on your house.

that means if you take out a new loan (cash out refinance) of $200K.  $100K goes to covering your current mortgage, and the other $100K can be taken out in cash.

Now keep in mind, this changes your loan terms and there would be a new interest rate. So you have to go over your specific numbers with a mortgage person, to make sure it specifically makes sense for YOU.

they can be great, but not for every single case.

hope that helps!

Noah Bacon · Answer

Hey Liam!Here are a few resources I'd highly recommend checking out!Here is a great video on what a Cash out Refi is from BiggerPockets Youtube channel!This episode from the Real Estate Rookie Podcast gives you an amazing breakdown of what a Cash out Refinance is vs. a HELOC (Home Equity Line of Credit)Check them out and let me know what questions you have!

Rachel K Reiman · Answer

I need the simple explanation as well :)

What is a cash-out refinance?

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