What is a Cash Out Refinance?
A cash out refinance allows you to take out a new loan that is larger than your existing mortgage and is based on the equity you have in your home. In the end, your current mortgage is replaced by this new one and you’ll only have one loan. The difference between your balance and the amount you borrow is returned to you in the form of cash.
For example, if your current mortgage balance is $200,000 and your new loan is for $300,000, you’re left with $100,000 in cash to use for anything you need.
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Popular Questions about Cash Out Refinance
You’ll receive a lump sum of cash, in the form of a check or bank wire, when you close on the new loan. The loan is first used to pay off your existing mortgage, along with any closing costs such as home insurance and real estate taxes. The remaining funds are yours to use.
You may save money with a cash out refinance if your new interest rate is lower than your current rate. For instance, if your current mortgage has a rate of 5% but you qualify for 3% with a cash out refinance, you’ll save money in interest over the long run.
With a cash out refinance, your current mortgage loan is replaced with a new one. With a HELOC loan, you’ll have a second mortgage loan. In both situations, your home is used as collateral and you’re entitled to use the funds however you want. Cash out refinances tend to offer lower interest rates, so it’s up to you to choose which option better suits your situation