A cash-out refinance occurs when a homeowner refinances their existing mortgage for a larger amount than what is owed, and receives the difference in cash. This difference represents the equity in the home, which is the difference between the current market value of the property and the outstanding mortgage balance.
For example, if a homeowner has a current mortgage balance of $150,000 and their home is currently valued at $250,000, they may choose to refinance for a new mortgage balance of $200,000. This would give them $50,000 in cash, which they can use for a variety of purposes such as paying off high-interest debt, financing home renovations, or making a large purchase.
It’s important to note that a cash-out refinance may result in a higher interest rate than a traditional refinance or home equity loan, as the lender is taking on more risk by lending a larger amount of money. Additionally, the homeowner will need to have enough equity in their home to qualify for a cash-out refinance.