- The process of cash-out refinancing is fairly simple as it allows you to take cash out based on the amount of equity that you have. For example, if a mortgage has a $150,000 balance and the home is worth $200,000, the owner could refinance the loan and take out $50,000. This is a simplified example because most lenders will not allow you to borrow 100 percent of the value of the house, but this is basically how cash-out refinancing works.
- When getting this type of loan, the loan-to-value ratio will play an important role in determining how much cash you can get. For example, with a new mortgage, the lender may only allow you to borrow 95 percent of the value of the house. The remaining 5 percent would have to be kept as equity in the house. This gives the lender some cushion in case property values decline rapidly and you cannot afford to make your payments.
- One of the primary benefits of using a cash-out refinance is it allows you to gain access to your home equity without taking out a separate loan. Many people would prefer to only have one loan to worry about paying on each month. Another benefit of using a cash-out refinance is the interest rates on these types of loans are generally lower than what you can get from a traditional home equity loan.
- When trying to decide whether you need to use a cash-out refinance, you have to consider several factors. For example, you need to look at the interest rate you will give up on your existing mortgage and the rate you will get in return. If the interest rate on your existing mortgage is very low, it may be to your advantage to simply take out a home equity loan to access your equity.
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