Cash-Out Refinancing, Quickly Explained

Cash-Out Refinancing Quickly Explained

Let’s look at how a cash-out mortgage refinance works, and some potential pros and cons.

With a traditional refinance, you pay off your current mortgage balance with a new loan, typically for the same amount.

You do this to get a lower rate or more favorable terms.

With a cash-out refinance, you convert some of the equity you’ve built into cash, and your new mortgage is for more than what you owe on your home.

The “cash out” amount goes to you in a lump sum payment, which you’ll repay over time as part of your new mortgage payment.

A cash-out refi can be a good source of low-cost funds.

It’s often used to pay for home improvements or large purchases, or to pay off higher-interest debt like credit cards.

But, because you’ll have a bigger mortgage, your payments may go up.

It also presents a risk if your home loses value. You could end up owing more than the house is worth.