Cash Out Refinance Mortgage

If you have equity in your home, a cash out refinance mortgage is one way to access funds.

With a cash out refinance, you refinance your home for more than what you currently owe, and pocket the difference.

Here's an example of how it works:

Let's say you owe $80,000 on your home, and your home has an apprised value of $150,000. The difference, $70,000, is the amount of equity of in your home. With a cash out refinance mortgage, lenders typically allow borrowers to tap into 75% of their equity. In this scenario, you could refinance your home for $132,500 and use the $52,500 (75% of $70,000) for home renovations, to pay off your HELOC or high interest credit card balances, to fund college expenses, or to purchase a vacation home.

Though requirements vary from lender to lender, most require these general conditions:

  • Must have a minimum credit score of 620

  • Must have at least 25% equity in your home

  • Must hold original mortgage for at least 12 months
As with any loan, it's important to read the fine print thoroughly, and to understand the costs, fees, and potential penalties before entering an agreement. Rates and fees vary widely, so be sure to shop around for the lender with the most favorable terms.

While a cash out refinance can address immediate cash flow issues and relieve the stress of high-interest financial obligations, it's best to avoid using your home as a source of revolving credit. Examine your motives carefully, and make sure that a cash out refinance really is in your best interests. Keep in mind that while you'll secure a lower interest rate than what you are currently paying for credit cards, you'll also extend the life of your home mortgage, which may end up costing you more than if you had tackled each debt independently.

Above all, avoid serially refinancing your mortgage; doing so could land you in a position of negative equity. Reserve a cash out refinance mortgage for times of great need, or when the rate is simply too favorable to pass up.

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