It’s a fact that today millions of people are facing overwhelming financial uncertainty due to the coronavirus pandemic. For some, cash-out re-financing can help homeowners fill in the financial blanks.

Traditional refinancing allows you to pay off an existing mortgage and to replace it with a new home loan. By doing so, it allows homeowners to take advantage of lower interest rates, to change the length of the loan or to switch from an adjustable-rate mortgage for one with a fixed mortgage rate.

A cash-out refinance—often referred to as a “cash-out refi”—is different from a traditional refinance in that it replaces the old loan with a new one that is for an amount larger than the amount needed to pay off the old mortgage note. The difference between what was borrowed and what it takes to pay off the previous loan goes into the borrower’s pocket, with no strings attached.

The Application Process for a Cash-Out Refi

A cash-out refi requires many of the same steps, processes, documents, and costs as a first mortgage.  A cash-out refi borrower will often have to pay an application fee, an origination fee, discount points, title search, and insurance policy premium, as well as other fees for survey, appraisal and insurance. You should start by inquiring with your current lender. But you should also shop around to get the best rate. Explore options with mortgage brokers, credit unions and other mortgage lenders. Many costs are negotiable, and the lender’s offers can vary widely. So be sure to shop around.

Refi Limits, Costs and Risks

Your main limit to a cash-out refi is whether or not you have sufficient equity in your home. It’s unlikely that a lender will loan you more than 80% of the value of your home. And closing costs are a significant feature of a cash-out refi. There’s also the prepayment penalty that some lenders require borrowers to pay if they pay off a loan prior to its due date. And since you’re replacing your original loan with a new one, you may have to pay this fee.

It’s important to remember that a cash-out refi is a loan: It’s not free money, despite its potential low cost. You pay it back a month at a time or all at once when the borrower sells the home or refinances the loan. There are resources to provide you with guidance if you’re considering a cash-out refi. You can take a closer look at the costs and benefits of a cash-out refi by contacting our office and speaking to a licensed loan consultant.

 

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