Cash-out refinance loans

There are two major types of refinancing: rate and term, and cash out. This guide defines cash-out refinance loans and explains when they might be appropriate.

Cash-out refinance loans involve paying off your original mortgage balance with a new loan with a larger balance. After the original balance is paid, the borrower can use the remaining funds for any purpose. This cash is borrowed against the borrower’s equity in the house.

An example might best illustrate how a cash-out refinance loan works. Let’s say that Jessica has a $150,000 mortgage that she paid down to $100,000 over time. Jessica has decided that she should really like to make some relatively expensive home improvements. To pay for them, she decides that she will refinance. She obtains a new mortgage for $125,000. $100,000 immediately goes toward paying off her original balance, while she uses the remaining $25,000 for remodeling.

As you can see, cash-out refinance loans are helpful to people who want to borrow money and pay it back over an extended amount of time. For this reason, many people use these refinance loans to pay for big purchases or college tuition.

Interest rates and monthly payments are generally lower for mortgage loans than other lines of credit, making cash-out refinance loans a great option for people who don’t want to pay the high interest on a credit card.

You can refinance with any lender, but you may want to contact your original mortgage lender first to see whether you are eligible for any special discounts. Most lenders offer fixed and variable interest rates. In either case, you will probably receive a lower interest rate than you could with a home equity loan.