A refinance in which the new loan amount exceeds the total needed to pay off the existing mortgage. The difference goes to the borrower and can be used for any purpose.
Cash-out refinancing is one method of converting home equity to cash. The other ways include selling the house, adding a home equity loan or home equity line of credit or taking out a reverse mortgage. When deciding on one of these options, homeowners should ask themselves a couple of questions:
- Does refinancing make sense without taking cash out? In other words, would the new loan generate enough savings to cover the cost of refinancing? If not, a home equity loan may be a better choice.
- Which method is less expensive – a rate-and-term refinance plus a home equity loan? Or a cash-out refinance? Cash-out refinances often come with higher fees than rate-and-term refinances.
Finally, there’s the limited cash-out refinance. The borrower does not usually receive cash from the transaction, but the costs of refinancing are wrapped into this loan. Occasionally, the borrower may receive a small sum when closing if the closing costs end up being less than expected.