What is a Cash-Out Refinance Mortgage?
A cash-out refinance mortgage loan can help you consolidate debt, remodel your home, pay for college, make a large purchase, or even buy another property.
With this type of refinance, you convert home equity into cash by creating a new loan for a larger amount to cover these expenses. For this to be possible, the current value of your home must be greater than the amount owed on your existing mortgage.
Here’s how a cash-out refinance mortgage works
As an example, let’s say the Walkers want to remodel their home, which will cost $100,000. When they originally purchased the property, the couple borrowed $400,000. Today, they owe $200,000 on their mortgage, which means they’ve built up at least $200,000 in home equity. Over the years, property values have increased in their neighborhood, and their home is now valued at $500,000. The Walkers can convert a portion of their home equity into cash using a cash-out refinance.
In this example, the couple can take out a new mortgage loan for $300,000. The new mortgage would pay off the $200,000 remaining balance from their original loan and leave $100,000 available to pay for remodeling costs.
Cash-Out Refinance vs. HELOC
A cash-out refinance is just one way to borrow against your home’s available equity. A home equity line of credit, or HELOC, is another popular option. What’s the difference between the two? A cash-out refinance is a new mortgage that pays off your existing mortgage, so it may have different terms than the original loan. At closing, you receive the excess amount—the cash-out portion—as a lump sum.
A HELOC is a variable rate, revolving line of credit with its own terms and repayment schedule separate from your first mortgage. You can use your home equity line of credit as needed for a certain amount of time, called a draw period, which is typically 10 years. When you pay back the amount you used, it becomes available to you again.
Here are some other key differences between a cash-out refinance and a home equity line of credit.
Cash-out refinance mortgage:
- Fixed or adjustable interest rates available
- One mortgage with one monthly payment
- A new mortgage with a higher loan amount using accumulated home equity
- Cash-out funds available at closing with payments spread out over a longer term
- May have a lower interest rate than home equity financing
Home equity line of credit:
- Variable interest rate connected to an index, typically the U.S. prime rate as published in The Wall Street Journal
- Interest rate changes as index rate changes
- Use funds as needed during 10-year draw period
- Revolving line of credit
- Flexible loan repayment options available
Is a cash-out refinance mortgage right for you?
A cash-out refinance can be a smart way to consolidate debt or pay for a large purchase, but it’s not right for every situation. A HELOC or another type of financing may be a better fit for you. Talk to a Flagstar loan advisor at Flagstar Bank about what you want to achieve. They will listen to your story and help you find the right home equity solution to reach your goal.
