When it comes to managing your finances, you have a few options to consider. Refinancing and cash-out refinancing are two of the most popular options for homeowners. Refinancing is when you take out a new loan to replace your existing mortgage, while cash-out refinancing is when you take out a new loan for more than your current mortgage balance and receive the difference in cash. Both options can be beneficial, depending on your financial goals.
A rate-and-term refinance is when you change your current loan to one with better conditions. This type of refinance does not involve taking out additional cash, but it can still be beneficial if you are looking to lower your interest rate or monthly payments. On the other hand, a cash-out refinance is when you take out a new loan for more than your current mortgage balance and receive the difference in cash. This type of refinance can be beneficial if you are looking to use the equity in your home for things like home renovations, tuition payments, or debt consolidation. When it comes to closing costs, lines of credit and home-equity loans tend to have significantly lower closing costs than cash-out refinances.
In some cases, the lender may even cover these costs. If you are only looking for a small amount of liquidity for a small project or to pay off a small debt, you may want to consider a small personal loan or a credit card with low interest rates instead of refinancing. This way, you can avoid the closing costs associated with refinancing, home equity loans, and HELOCs. A cash-out refinance also replaces your current mortgage loan with a new one. However, unlike a rate-and-term refinance, your new loan balance will be larger than what you currently owe.
This “additional” loan amount will be returned to you as a cash refund at closing. Cash-out refinancing provides all the benefits of a standard refinance, including a lower rate and other potential beneficial modifications. Unlike when you apply for a second mortgage, a cash-out refinance does not add another monthly payment to your bill list; you pay off your old mortgage and replace it with your new one. After disbursing the loan funds, you are left with the difference between your new loan amount and your current mortgage loan balance (minus the principal you leave in your home and closing costs and fees). Most homeowners find that they can do a cash-out refinance when the value of their home increases. A cash-out refinance generates less equity in your home than other options, which means the lender is taking on more risk.
The only exception to this rule is with refinancing a VA loan, which does not require you to leave any equity after refinancing. Many homeowners use a cash-out refinance to fund large expenses that will ultimately increase their net worth. In particular, VA cash-out refinancing allows for a maximum Loan-to-Value (LTV) ratio of 100 percent, which means that eligible borrowers can withdraw the entire accumulated value of their home. Cash-out refinancing is an attractive option because it offers low interest rates compared to other forms of borrowing money. Department of Veterans Affairs (VA) loans, including cash loans, can often be refinanced through more favorable terms with lower rates than non-VA loans.
