Cash-Out Refinancing 101

As housing prices soar, you can take advantage and make the most of your home’s equity. Cash-out refinancing is one exciting option to consider.

What is cash-out refinancing?

“In simple terms, a cash-out refi is tapping into your home’s equity to get cash for making improvements, completing a big purchase, paying off a loan or consolidating debt,” says UW Credit Union Director of Mortgage Operations Paul O’Connor.

Like any refinance, a cash-out refinance replaces your existing home loan with a new one. The difference is that the new, larger loan is available as cash.

A quick example

Imagine you’ve purchased a home for $300,000 and put 20% down ($60,000) when you bought the home. So far, you’ve paid off an additional $50,000, leaving $190,000 that you still owe. An appraisal shows your home value has increased by $50,000.

The amount you’ve paid ($110,000) plus the amount your home value has increased ($50,000) is your home’s equity ($160,000).

With a cash-out refinance, a portion of your total equity is added to your new home loan and the difference is paid to you.

Let’s say you’re planning a home renovation project you guess will cost $30,000. In the above scenario, your cash-out refi would create a new $220,000 home loan – the $190,000 you still owe plus the $30,000 you withdraw as cash.

In general, lenders will cap the amount of cash you can draw at 80% of your home’s value – meaning you won’t have access to all of your equity. Terms will vary by lender, though.

Reasons to consider a cash-out refi

With minimal restrictions on how you use the money, you can get creative with your cash-out refi.

“Two of the most common approaches are covering a home renovation project or consolidating debt, such as credit card balances and student loans,” says Paul.

“Other people invest the money from their cash out,” he adds, “And I know people who have used it to buy cars or to purchase a second home.”

Be sure to fully consider your decisions. If, for instance, your investment return is likely to be lower than the interest rate on your refi, you might be better off using the cash elsewhere.

The process

Like other loans, a cash-out refinance requires an application to verify eligibility.

“The review takes into account your income, assets, credit and details of the property itself,” says Paul. “It’s no different than qualifying if you came in to buy a house.”

Your lender will review the application and gather any additional information. This review helps the loan officer write your new loan.

The lender will provide you with loan terms, interest rates, repayment conditions and an estimate of how much cash you can take out.

If you’re interested in continuing, the lender will order a home appraisal to determine its value. They may also ask for additional information such as pay stubs, W-2s, proof of insurance, etc.

From there, the loan will be processed and approved.

Closing

Once the loan is approved, the lender will schedule a closing to sign new financing documents. After three days (the mandatory waiting period during which you can change your mind), your cash-out funds will be wired to you.

From start to finish, the whole process typically takes about a month.

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