Cash Out Refinance – How It Works

A cash out refinance is a way to get more money from your home’s equity. It’s similar to a home equity loan, but it can be more beneficial for you. Here’s how they compare:

It’s not the same as a home equity loan.

Cash out refinancing is not the same thing as a home equity loan. If you have equity in your home, a cash-out refinance can be used to pay off your existing mortgage and help you get more cash at closing.

Cash Out Refinance Loan Process

The process of getting a new loan from a bank or financial institution involves two steps:

You will apply for a new loan using the equity in your home as collateral for the new loan amount;

You will use the money from this second loan (the bigger one) to pay off whatever you owe on your current mortgage

Homeowners typically refinance to save money on interest payments or to convert their adjustable rate loan into a fixed rate mortgage.

Refinancing your home to reduce the amount of money you pay in interest is one of the most common reasons people refinance. Interest can add up quickly, so saving money on interest payments can help homeowners avoid paying more than they have to over time. Another common reason for refinancing is to convert an adjustable rate mortgage (ARM) into a fixed rate mortgage, which provides more stability for homeowners and is less risky for lenders.

Homeowners who want to use their home equity may also refinance to pay off credit card debt or other high interest debts like student loans, car loans and personal loans. This allows them to use their monthly savings from lower payments toward reducing their overall debt load instead of making additional payments every month that are just going toward paying down old debt instead of building equity in their home or retirement fund.