What is a cash out refinance and how does it work?
How does a cash-out refinancing work?
For example, let’s say you owe $ 200,000 on your mortgage but choose a new loan with a lower interest rate. With a payout refinance, you could choose to borrow $ 240,000. The first $ 200,000 of this loan would be used to pay off your existing mortgage and you would receive a check for the remaining $ 40,000.
How much does it cost to do a cash out refinance?
You bear the closing costs in the course of the refinancing. Typically, the closing cost is 2% to 5% of the loan amount, but this depends on the lender. With cash-out refinancing, you can assume that your closing costs will be in the same range. Remember, however, that it costs more to complete a payout refinance than a regular refinance because you are borrowing more money.
When does cash-out refinancing make sense?
A payout refinance can be a great way to borrow money cheaply as the interest rate on your mortgage can be much lower than what you pay on a home equity loan, or HELOC (Home Equity Credit Line of Credit).
But keep in mind that if you refinance with a payout, your monthly mortgage payment could go up even though you get a lower interest rate because you borrow more. That could make it harder to keep up with these payments.
You may want to get a cash out refinance if you need to finance home repairs or improvements. You can also get a cash out refinancing as a form of Debt consolidation. For example, if you have credit card debt, you can use the money from your cash-out refinance to pay it off and then repay your new mortgage at a lower interest rate.
If you are thinking of doing a cash out refinance, use a mortgage calculator to figure out what your new monthly payment will be and make sure you can really afford it. When refinancing, you should also check out various mortgage lenders. Each lender sets their own interest rate and closing costs, so comparing multiple quotes is a great way to make sure you get the best deal in the end.