What Is a Cash-Out Refinance?

The best time to refinance a mortgage is when interest rates are low. For the past few years, the federal government has enacted policies that have kept interest rates incredibly low. This has compelled homeowners to consider refinancing their homes. If you’re also trying to get some cash out of your home investment, you might have wondered “what is a cash-out refinance and how does it work?” Let’s take a look.

Cash-Out Refinancing, Explained

With a cash-out refinance you pay off your mortgage and it’s replaced by a new, higher loan. The additional amount on your loan is paid to you in cash, which you can then use however you like.

“Usually a cash-out refinance is going to come with a little bit of a higher interest rate and there are some parameters,” explains Kevin “KC” Duffy, Managing Partner & Founder of MacAsh.

One of the main parameters is that you can typically take out a new loan for up to 80% of your home’s value. That’s so you leave 20% of your equity untouched.

Here’s an example of how the numbers look in a cash-out refinance:

• Let’s say you have a home that’s valued at $500,000.
• You owe $250,000 on your original loan.
• You do a cash-out refinance loan for $350,000
• You get $100,000 in cash (minus closing costs of 3% to 5%)

"It's something we can get done in about two weeks," says Kevin Duffy. "I did it a couple of years ago—I re-did the kitchen and went to Disney."

How To Prepare for a Cash-Out Refinance

When you first bought your home, you likely took some time to prepare your credit score and finances for the big investment. You might need to do the same for cash-out refinancing, though the steps might be a little different.

1. Reduce Your DTI

Reducing your debt-to-income ratio (DTI) can significantly improve the interest rate you receive. Interest rates are based on the level of risk the bank foresees. If you have high credit card debt and recent delinquencies that can signal a high risk to lenders.

2. Review Your Credit Score

It might be quite some time since you last checked your credit score, but if you’re considering a cash-out refinance, it’s definitely time to dust off those credit score apps. You should also consider requesting free copies of your credit history, so you can dispute discrepancies and clear up any issues as best as possible.

3. Prep Your Property

Most lenders will require an appraisal to determine the true value of your home before moving forward. There’s no need to get carried away with renovations, but ensure your home is up to code and there are no major repairs left undone.

When You’re Ready To Start

You’ve been paying for your home for years. It’s about time it paid you back! Find out how MacAsh Home Loans can make it happen.