What Is a Cash-Out Refinance?
A cash-out refinance is a refinancing of an existing mortgage loan, where the new mortgage loan is for a larger amount than the existing mortgage loan, and you (the borrower) get the difference between the two loans in cash. Basically, homeowners do cash-out refinances so they can turn some of the equity they’ve built up in their home into cash.
Here’s an example to illustrate: Let’s say you own a $1,000,000 house and still owe $500,000 on the current mortgage. This means you’ve built up $500,000 in equity – i.e. ownership. However now you require cash of $200,000. You have the option to do a cash-out refinance; that is to get a new loan worth total $700,000 ($500,000 you still owe on your home and the $200,000 you’re going to take out in cash).
What are the costs involved?
Ideally a cash-out refinance is similar to a regular refinancing of a mortgage where it is required to pay closing costs. Depending on the loan, this can go upto $3000. However, we at Transglobal Lending will cover your closing cost in addition to offering you the best rate.
HELOC vs Cash-out?
People who need cash often contemplate either to go with a HELOC or a cash-out refinance. Even though ideally a cash-out refinance offers a lower rate, it may not be suitable/eligible for every individual.
With HELOC, the process is relatively faster and the closing costs are lower. If your need is only for a year or two, taking a higher rate for a short period ends up being cheaper overall because the closing costs can be quite a bit lower with a HELOC.
And ff the need for cash is more medium to long term and the amount of cash required is significant, a cash-out refinance may end up being a better deal because you’ll likely be paying interest for many years. And you don’t have to worry paying the closing costs, as we do it for you.
The table below compares the HELOC vs. a cash-out refinance.
How much cash can I get?
A lender will never lend the borrower an amount that is more than the value of the property because the lender has a lien on the property and the property is held as collateral. borrowers can have multiple loans against their home.
The maximum cash a borrower can get is calculated such that the total of all such loans is no more than 80% of the value of their home. In other words, the Combined-Loan-To-Value (CLTV) of their home is less than 80%.
This limit for second homes and investment properties is only 75%. And for 2-4 unit multi-family properties, that limit is even lower at 70%. See the table below that shows limits for conventional loans.
Still not sure if a cash-out refinance is right for you? please feel free to reach out to us. We do our best at guiding you to make the most informed decision. Click here to get started!