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Cash out refinance: Definition and how it works

A cash-out refinance replaces your current mortgage with a new, larger mortgage, allowing you to access the difference between both loans in cash. In other words, a cash-out refinance allows you to convert home equity into money; the amount is based on the equity you have built up in your property. The funds that you get from a cash-out refinance can go toward pretty much anything, like home improvements or consolidating high-interest debt, among other financial needs. 

A cash-out refinance is similar to a mortgage refinance, or a rate-and-term refinance, in which you replace your current home loan with a new loan for a shorter loan term, a lower interest rate, or both. The major difference with a cash-out refinance is that you can take out some of your home equity as a lump sum.  

Generally, refinancing is a popular option if you want to replace your current mortgage with a new one to extend more favourable terms, as mentioned. The more favourable terms that make refinancing a popular option also include: 

  • Lower monthly mortgage payments 
  • Lower interest rates 
  • Remove or add borrowers from the loan obligation 
  • Renegotiate the periodic loan terms  
  • Access cash from the equity in your home 

How cash-out refinance works 

Essentially, cash-out refinancing lets you use your property as collateral for new home loans plus extra money. This is done by taking out a new mortgage for more money than you owe on your current mortgage. Using your home equity to gain access to your funds is an easy way to get money for emergencies, expenses, and even leisure.  

If you want to pursue a cash-out refinance, you will have to find a lender who is willing to work with you. Your lender will look at your current mortgage terms, your credit profile, and the balance needed to repay the home loan. Then, based on an underwriting analysis, the lender will make you an offer.  

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