What is a Cash-Out Refinance?
Like many forms of home loans, refinancing revolves around how much of your home's value you own – your home equity. Simply put, when approved for a cash-out refinance, a bank allows you to exchange some of that home equity for cash, in exchange for a new interest rate and overall balance. Because a cash-out refinance generally requires the homeowner to own a large percentage of their home's equity, it's an option that is available to homeowners who have lived in their home for many years.
In practice, here's how the numbers for a sample transaction might play out. Imagine that you own a $500,000 home with $400,000 already paid off and $100,000 remaining in monthly mortgage payments. You're overdue for a kitchen remodel, but need $40,000 to pay for the improvements. You decide to take out a cash-out refinance to cover the gap in your budget, replacing your original mortgage with a new one. You now owe $147,000 on your current mortgage ($140,000 loan amount plus fees at 5%) and have a check for $40,000 left to spend on your home improvements.
Typically, cash-out refinancing can be used for any purpose, but some lenders will only supply a ‘limited’ cash-out refinance, meaning it can only be used for certain purposes. These limitations are generally related to your home itself, meaning the lender would not approve a cash-out refinance for uses like student loans, credit card debt, or medical bills.
Requirements for a Cash-Out Refi
As with any large-scale financial decision, you'll have to meet some requirements in order to qualify for a cash-out refinance. Since this type of home loan requires monthly payments, your lenders' number one concern will be your ability to pay them back. They'll review your financial profile to see: