Cash-out Refinance

Cash-out refinance is something of a catch-all phrase. There are a number of ways of actually achieving the same goal so it isn’t really one specific set of actions. It is, rather, the end result, that by refinancing something, cash is taken out of the equity available.

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Take this example to see what cash-out refinancing means. Jim has a house that he bought ten years ago in California for $200,000. He paid with a 20% deposit and a standard 80% mortgage for $160,000. Three years later he has paid off some of the principal of that loan, but that probably isn’t the important point. Depending upon where in California that house is it might be worth $600,000 now. So he actually has $440,000 (after deducting the principal of the mortgage) of home equity. Just as an example, he also has a daughter about to go to an expensive university and she needs $100,000 to do so. What Jim wants to do therefore is take some of that equity, the value in the walls of his house, and turn it into cash he can spend on his daughter’s education.

There are a number of ways he can do this. He could take our a new loan for $260,000 and pay off the old one. That gives him $100,000 to spend. He could get a second mortgage for $100,000. He could add the $100,000 to his existing mortgage. All of these are a cash-out refinance: which is the best depends upon the specific circumstances of both Joe and the original mortgage.