What is a cash out refinance?
A cash-out refinance is a mortgage option in which the borrower replaces an
existing mortgage loan with a higher loan with the aim of renegotiating the terms of the
mortgage to be more favorable or to access cash over home equity.
In real estate, there are quite some options open to the borrower when refinancing. These
options include a decrease in the monthly mortgage payments, conversion of home equity into
cash or adjusting the number of years or term of mortgage. However, most common cash-out
refinance involve higher interest rates while the borrower receives the difference in cash.
For example, a homeowner that has paid $300,000 on his mortgage loan with $200,000 left can
activate the option to do a cash-out refinance by requesting that $60,000 from the home equity
he has built or paid back be given to him in cash. Thus, he now has $260,000 to pay as his
mortgage loan with higher interest rates.
On the other hand, a loan-to-loan ratio is calculated by the lender to determine the maximum
amount that the borrower may cash out.
For many homeowners looking for a lump sum cash, a cash-out refinance option is a good