Cash-Out Refinancing: Basics to Understand

There are several types of refinancing homeowners might consider for their mortgage, and one of these is known as cash-out refinancing — and is a bit different than most other types. While the majority of other refinancing methods exist to lower your payments or change your loan term, cash-out refinances allow you to leverage your built-up equity and actually receive extra cash at closing time, which can then be used for various expenses or needs.

At Clarity Quote, our mortgage calculators include the best refinancing calculator options in the business, helping numerous lenders and their clients determine the ideal timing and situations for refinancing — including cash-out refinancing. Our products pair well with Black Night and Optimal Blue solutions, as well. What exactly is a cash-out refinance, how does it work, and what are some of the reasons you might be considering one? This two-part blog series will go over everything you need to know.

cash-out refinancing basics

Cash-Out Refinance Basics

A cash-out refinance refers to a situation in which the homeowner is looking to receive a certain amount of money at closing, above and beyond what may be owed on their existing mortgage. This extra cash can come from:

  • Equity they have built up since buying their home
  • The elimination of second mortgages or other additional financing they may have on their home

The cash-out amount is almost always going to be equal to the equity built up in a homeowner’s property, and it works to augment how much money a homeowner might get with a traditional refinance. One of the biggest benefits of this type of refinance is that it can be a solution for homeowners who want to use the money they receive at closing for certain things, as opposed to using it as a refinancing tool.

Now, there may be limits on the cash you can receive with a cash-out refinance. For instance, you won’t necessarily get 100% of the cash that matches the equity you have in your home — and the percentage you receive is generally going to be related to where your current loan-to-value ratio stands. In most cash-out refinancing situations, your LTV will need to be at or below 80%, which means you’re eligible for a certain amount of cash out.

There are several different reasons why you would consider taking out a cash-out refinance on your home, most of which have to do with maximizing your access to the cash built up in your equity. Our next several sections will go over these.

Debt Consolidation

Perhaps the most common reason homeowners utilize a cash-out refinance is to consolidate their debt. A cash-out refinance can help you get rid of second mortgages or other financing that may be on your home — freeing up more money for an overall lower rate.

For more on cash-out refinancing and how it works, speak to the mortgage professionals at Clarity Quote today.