How Does a Cash-Out Refinance Work?

Here’s how a cash-out refinance works. The lender assesses the previous loan terms, the balance needed to pay off the previous loan, and the borrower’s credit profile. The lender makes an offer based on an underwriting analysis. The borrower gets a new loan that pays off their previous one and locks them into a new monthly installment plan for the future.

With a standard refinance, the borrower would never see any cash in hand, just a decrease to their monthly payments. A cash-out refinance can possibly go as high as approximately 125% of loan to value. This means that the refinance pays off what they owe and then the borrower may be eligible for up to 125% of their home’s value. The amount above and beyond the mortgage payoff is issued in cash just like a personal loan.

Individuals with specialty mortgages like U.S. Department of Veterans Affairs (VA) loans or Federal Housing Administration (FHA) loans qualify for specialty refinance options. VA loans can often be refinanced through more favorable terms with lower fees and rates than non-VA loans. FHA loans qualify for streamlined refinancing, but the limit of cash-out on a streamlined FHA loan refinancing is $500.

Mortgage lending discrimination is illegal. If you think that you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

Rate-and-Term vs. Cash-Out Refinance

As mentioned above, borrowers have a multitude of options when it comes to refinancing. The most basic mortgage loan refinance is the rate-and-term refinance, also called no cash-out refinancing. With this type, you are attempting to attain a lower interest rate or adjust the term of your loan, but nothing else changes on your mortgage.

For example, if your property was purchased years ago when rates were higher, then you might find it advantageous to refinance to take advantage of lower interest rates that now exist. In addition, variables may have changed in your life, allowing you to handle a 15-year mortgage (saving massively on interest payments), even though it means giving up the lower monthly payments of your 30-year mortgage. With a rate-and-term refinance, you could lower your rate, adjust to a 15-year payout, or both. Nothing else changes, just the rate and term.

Cash-out refinancing has a different goal. It allows you to use your home as collateral payday loans Kentucky for a new loan as well as some cash, creating a new mortgage for a larger amount than what is currently owed. You receive the difference between the two loans in tax-free cash (the government does not count the money as income-it is more like a mortgage-personal loan hybrid). This is possible because you only owe the lending institution what is left on the original mortgage amount. Any extraneous loan amount from the refinanced, cash-out mortgage is paid to you in cash at closing, which is generally 45 to 60 days from when you apply.

Compared to rate-and-term, cash-out loans usually come with higher interest rates and other costs, such as points. Cash-out loans are more complex than a rate-and-term and usually have higher underwriting standards. A high credit score and lower relative loan-to-value (LTV) ratio can mitigate some concerns and help you get a more favorable deal.

Home equity loans and home equity lines of credit (HELOCs) can be other alternatives to cash-out or no cash-out (or rate-and-term) mortgage refinancing.