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A cash out refinance is cashing out home equity by refinancing into a new mortgage with a higher balance than the old 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 $255,000 which is 85% loan to value (LTV). That means you can “cash out” $55,000 minus closing costs.

Limited 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 pocket any cash, 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 limited cash out allows for 2% of your loan amount or $2000 cash back at closing whichever is less and still is not considered a cash out refinance. So you could get a little cash back at closing without the restrictions of a cash out refinance.

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 $48,000. If you choose to increase your rate to pay closing costs, then you would get $55,000.

You are capped at 85% loan to value for a cash out refinance of an owner occupied home.

Cash Out Refinance Rates

Most of the time you just get told the rates for a cash out are higher than no cash out. But that is not the whole truth. A cash out refinance is more expensive but it does not have to be a higher rate.

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 refinance does not require the expensive cash out add on expense.

And a cash out refinance investment property add on is going to be even more because you have to pay for both the investment aspect and the cash out and you are capped at 75% loan to value.

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. This restriction is only for home owner refinances, not investment property refinances.

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

Cash Out Questions Answered

Is getting a cash out refinance before intentionally defaulting on the mortgage fraud?

A mortgage loan is considered a long-term obligation made in good faith. Hiding the real intention at application in my view is mortgage fraud.

This could also be considered theft.

Intentionally taking the cash out refinance proceeds and then immediately defaulting is probably legally more like grand theft…or theft by fraud…or any number of crimes.

Of course, I must add my typical disclaimer here…seek actual legal advice from an attorney as I am not an attorney before making any decisions.

Should you use a cash out refinance to pay for an addition on your home?

Everyone’s situation is different but here is my general advice.

A first mortgage cash out refinance should most likely be avoided since the loan amount will be much bigger than the cash needed and therefore all the costs will be correspondingly bigger as well.

This advice would change if your existing first mortgage has some “bad” terms like an adjustable rate or a balloon payment you’d need to get rid of anyway. A cash out refinance in that case would kill two birds with one stone.

The best way is usually a home equity loan of one kind or another. Then you can draw off it when you need it.

I hope this articles gets down to the nitty-gritty on cash out refinances for both home owners and investors.

Good Luck!

Author: The Mortgage Insider

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