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What Is a Cash-Out Refinance Loan? 

What Is a Cash-Out Refinance Loan?

Strapped for cash? You’re not alone. 51 percent of Americans have fewer than three months’ worth of emergency savings.

Fortunately, there are ways to get access to extra cash when you need it. Whether you’re trying to make major repairs on your home or you plan to pay off credit card debt, getting a cash out refinance loan can be helpful.

Here’s what you need to know about cash-out refinance loans.

What Is A Cash Out Refinance Loan?

A cash-out refinance is an option for refinancing a mortgage. You’ll replace your mortgage with a new one of a larger amount. This allows you to get a bit of extra cash beyond your current mortgage amount.

Unlike a typical refinance in which a mortgage will be renegotiated with different terms, a cash-out refinance will also allow you to get extra cash that you can use for a variety of purposes. 

How Does A Cash-Out Refinance Work?

If you want to get a cash-out refinanced loan, you’ll need to get a home appraisal and will need to know the current value of your home.

Usually, you’ll need to have a minimum of 20 percent equity in your home in order to be approved by a lender. You’ll also need to meet other lender requirements as well. This may include having a good debt-to-income ratio of under 45 percent and a credit score higher than 620.

If you’re getting a conventional loan, then it will also be necessary that you own your home for a minimum of six months before you seek a cash-out refinance loan.

Keep in mind that specialty mortgages may have different requirements and terms. For example, there are many different types of VA loans. Be sure to do your research when trying to determine the terms and requirements for any loans that you’re considering.

Benefits Of A Cash-Out Refinance

There are many benefits of a cash-out refinance loan.

Many of these benefits are similar to those of typical refinance loans. When you refinance, there’s the possibility of getting lower interest rates and you can potentially get better mortgage terms in other ways as well.

On top of these benefits, however, cash-out refinancing loans are useful because you’ll get extra cash that you can use for a variety of purposes. You may choose to use the money for debt consolidation, home improvement projects, or paying major expenses.

Another benefit is that a cash-out refinance also allows you to continue to have just one loan to repay. This is unlike other home equity loan options such as second mortgages. 

Disadvantages Of A Cash-Out Refinance

There are risks and drawbacks of a cash-out refinance loan as well.

One of the biggest issues is that you’ll need to pay closing costs on the refinance and this could be a significant amount. It will usually be between two to five percent of your loan.

Additionally, you may need to pay for private mortgage insurance if you decide to borrow 80 percent or more of your home’s value.

Keep in mind that cash-out refinancing is also slow, so it’s not an ideal option for emergencies in which you need fast cash.

Final Thoughts

If you need to get access to some extra funds, then a cash out refinance loan can be a good solution. While there are drawbacks, a cash-out refinance can be a good tool for consolidating debt and paying for major expenses.

Need more helpful mortgage information? Start reading through our blog now to find more useful posts. 

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