Refi/cashout? Having a hard time wrapping my head around it.

[Chris Stromdahl]

I understand the concept, but how does it work?

fter I refinance, what am I cashing out?

In what form dAoes the cashout come?

• Cash in the form of a check?
• A line of credit at the bank that can be used in any way I decide?

What is the typical interest rate?

This has come up in convos relative to HELOCs. I understand the HELOCs and where that money comes from, this one is next.

Thanks, Chris

[Jon Holdman]

There's no relationship between rate and term vs. cash out and homeowner vs. investor.  You do a rate and term refi when you want to reduce your payments.  That could be a homeowner or an investor.  You do a cash out refi when you want to get cash.  These really are almost exactly the same transaction.  The difference is that with a cash out the borrower is increasing the total amount of money borrowed and sticking the extra in their pocket.  Note that both will have costs associated with them, so even a rate and term refi will result in a larger debt if the costs are rolled into the new loan.

Its also possible to do a "cash in" refi where you have to bring cash to closing to get the new loan.

The amount of cash you can get is related to, but not based on, the equity. Its based on the total value. For an investor loan, you might be able to get a 80% LTV loan. That is, the lender will loan you 80% of the value. So, say you bought a house for $100K, put in a $20K down payment and spend $20K fixing it up. A year later, a new appraisal says its worth $175K. The existing loan would have a balance owed of a bit under the original $80K balance. Payments at first are almost all interest. If a bank will lend you 80% of the new value, you could get a loan for $140K. Costs vary, but I'd guess them at around $5000. So, after paying off the old loan and covering the costs you would have $55K in cash. You would now have $140K in debt instead of $80K. But you have the $40K you put in up front back plus another $15K. This can help you expand your portfolio, if you can do it. Its not easy to get these loans, especially if you already have more than four mortgaged properties. Lenders are a lot more willing to make a loan to pay off another loan than to hand over cash.

Note, also, that all this still applies if you own a house free and clear.  There's just no existing loan to pay off.