What is a Cash-Out Refi & How Does It Work?

Everyone is familiar with the phrase “home is where the heart is.” But did you know it’s ALSO your biggest financial asset? If you are a homeowner with equity, there’s a way to turn some of that value into cash—without putting up a “For Sale” sign. It’s called a cash-out refinance (“cash-out refi”). So, what is a cash-out refinance and how does it work? Let’s cover the basics!

Cash-Out Refinance Meaning

Let’s keep it simple: A cash-out refinance is a way to trade your old mortgage in for a new, bigger one—then receive the difference in cash. In other words, you “cash out” a portion of the equity you’ve built in your home over the years. Unlike a standard mortgage refinance, which only swaps your original loan for one with better terms, a cash-out refi puts money directly in your pocket.

The best part? You can use the money for just about anything. Here are some common reasons homeowners consider cash-out refinances:

• Pay for major home renovations or repairs
• Consolidate high-interest debts (goodbye, credit card stress!)
• Cover large expenses like medical bills or tuition
• Build an emergency fund
• Invest in other opportunities

How a Cash-Out Refinance Works

Ready to turn your house into a money tree? The cash-out refi process is more straightforward than you might think. Let’s walk through each step so you know exactly what to expect.

1. Review Your Equity:

Before you can refinance, your lender will look at two things:

1. How much money your home is worth today
2. How much you still owe on your current mortgage

Let’s say the market value of your house is $500,000. Since you bought your home, you have paid all but $150,000 of your mortgage (amount owed). This means your home equity is $350,000, which is calculated by subtracting $150,000 from $500,000. Mortgage lenders care about your equity because they require collateral for the money they lend you.

2. Decide How Much Cash You Want to Receive:

Most lenders will let you borrow up to 80% of your current home value, which is called loan-to-value (LTV). That means you could receive up to $400,000 in this example because 80% of $500,000 is $400,000. However, since you still owe $150,000 on your current mortgage loan, you could take out up to $250,000 in cash ($400,000 – $150,000 = $250,000).

FYI: You don’t have to take out the maximum amount. In fact, many homeowners choose to borrow less so they can keep more equity in their home.

3. Apply for a New, Larger Mortgage:

With a cash-out refinance, you are replacing your current home loan with a new one for a higher amount. The new loan will pay off your old mortgage and give you the extra money in cash.

In our example here, you apply for a new mortgage of $400,000 (the most you can borrow):

• $150,000 pays off your old loan
• You request to receive $250,000 in cash at closing.
  * FYI, this doesn’t include closing costs, which may reduce your cash a bit.

4. Close on the New Loan and Receive Money:

Once your refinance is approved, you go through the closing process—similar to when you first bought your house. After closing, you receive your cash (often as a direct deposit or check).

Then, the $250,000 is officially yours to use. Some people use it to pay off high-interest debt, fund home improvements, or cover large expenses.

5. Start Making Payments on the New Home Loan:

Congratulations! You have a mortgage with new terms. Your monthly payment is now based on the new $400,000 loan. This may include a different interest rate, loan length, and monthly payment amount, which could be higher or lower than it was before.

Get a Cash-Out Refinance at Academy Bank

So, why choose a cash-out refinance? It’s a smart solution if you have equity in your home and want access to extra money. With a cash-out refi, you can get the funds you need without taking on additional debt or juggling more payments.

At Academy Bank, we make your refinancing experience simple, quick, and personalized with features such as:

• Fast approvals so you can get money sooner
• Competitive refinance rates to help you save money
• Flexible options, with both fixed and adjustable-rate mortgages available
• Easy, streamlined process from application to closing
• Dedicated loan advisors to guide you every step of the way

If you are ready to put your home equity to work and kickstart your next big goal, we’re here to make it happen! Reach out to an Academy Bank loan officer today and let’s turn your home equity into your next big opportunity!

Explore Cash-Out Refinances

ONLINE MORTGAGE CALCULATORS:
Should I Refinance My Mortgage Calculator
Refinance Break-Even Calculator
Conventional Mortgage Refinance Calculator
FHA Loan Refinance Calculator
Mortgage APR Calculator
Adjustable Rate Mortgage Calculator