Cash Out Refinance

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A cash out refinance is when you cash out home equity by refinancing into a new mortgage with a higher principal balance than the current mortgage in order to pocket the difference.

For example, your home is worth $300,000 and your current mortgage balance is $200,000. You can increase your new loan amount all the way up to $270,000 which is 90% loan to value (LTV). That means you can “cash out” $70,000.

Cash Out Refinance Differences

There are different levels of a cash out refinance. A limited cash out refinance is when you do not take any cash out but roll your closing costs into the new mortgage. Even though you do not take cash out, part of the new loan was used to pay for costs so it is called a limited cash out.

Many people have questions on that when they see it on the application. because they thought they were not taking cash out. A no cash out would be when the new mortgage balance is the same as the old one. That means you pay all the closing costs and escrows at closing out of your own pocket. Those are rarely ever done.

A refinance with cash out is used for many different reasons and it doesn’t always mean you leave with cash in your hand. When you refinance a first mortgage together with a home equity loan or second mortgage, that is a cash out refinance. When you pay debt with the proceeds on a debt consolidation loan, that is also a cash out refinance.

You still have to factor in closing costs as with any mortgage. If you pay your costs and get the lowest rate, then your cash back amount will be lowered by the costs. So in the example above, your closing costs are $7,000 and your cash back is now $63,000. If you choose to increase your rate to pay closing costs, then you would get $70,000.

A cash out refinance has an add on. Depending on your FICO score and LTV, it can be pretty expensive. The add on is an expense you pay as part of your closing costs or increase the rate to pay it. A limited cash out does not require an add on.

Also, if you are expecting to walk away with money at closing, that won’t happen. You won’t get your cash the day you sign. Since it is a refinance, the 3 day right of rescission applies so you won’t get your cash until the 3 days have past.

If you want to see what your payment will be with a cash out refinance, we have debt consolidation and refinance savings mortgage calculators.