Cash Out Refinance in Relation to Home Loans
How does a cash out refinance work?
A cash out refinance uses your home equity to issue a new loan to replace the old one and give you a cash payout. Say your home is valued at $400,000 and your mortgage stands at $250,000 which means that your home equity is $150,000 ($400,000-$250,000). Using your home equity as collateral you can take out a new loan of $320,000, which will cover the $250,000 mortgage and you get a cash payment of $70,000 ($320,000-$250,000). A cash out refinance can be thought of as a mix of refinancing and a home equity loan.
Unlike other home equity loans, cash out refinance loans come with higher closing fees, that is because you are paying for the entire loan amount ($250,000) and not just the cash out ($70,000). Whether you qualify for a cash out refinance and the terms of the loan all depend on your risk profile (debt to income ratio, credit score, employment, etc).
The interest rate on cash out refinance loans is lower than most debt including other types of home equity loans. This makes it a great option for consolidating high-interest debt and taking advantage of falling rates. Mortgage interest is tax-deductible, so as you consolidate you can turn more debt payments into tax deductions.