Understanding Cash-Out Refinances

If you’ve built up significant equity through your monthly payments and your home’s appreciation, a cash-out refinance may make sense to improve your general financial situation or additionally the value of your home. With a cash-out refinance, you’re refinancing your mortgage for more than you currently owe and, in return, getting a portion of your equity back in cash.

How does a cash-out refinance work?

For instance, let’s say:

  • You purchased your home 10 years ago for $200,000
  • You made a 10% down payment and secured a mortgage for $180,000 at 5.5%
  • Through 10 years of making your monthly payments and paying down principal, you’ve built $30,000 in equity. Then, add the $20,000 you made as a down payment and you have $50,000 in equity
  • Your home’s current value, based on comparable home sales in the neighborhood, is $270,000

You now have $70,000 (current value – original value) + $50,000 (built up equity) = $120,000 in total equity.

Then, you decide you could use some of the cash you’ve built in your home to help pay for college tuition. With a cash-out refinance, you can receive a portion this equity in cash.

Let’s say you’d like to take out $25,000 in cash. Your lender would add this amount to the current amount you owe on your home. Therefore, this would result in a new loan amount of $150,000 (original loan amount – principal paid) + $25,000 = $175,000.

This loan will have new rates and terms. Additionally, you’ll be responsible for all closing costs associated with the refinance.

Contact us if you are interested in exploring your options with a cash-out refinance and we would be happy to review your financial picture to see if it’s right for you.

Source: Freddie Mac