A cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on your house. The difference goes to you in cash and you can spend it on home improvements, debt consolidation or other financial needs. You must have equity built up in your house to use a cash-out refinance.
Traditional refinancing, in contrast, replaces your existing mortgage with a new one for the same balance.
Has slightly higher interest rates due to a higher loan amount.
Limits cash-out amounts to 80% to 90% of your home’s equity.
In other words, you can’t pull out 100% of your home’s equity these days. If your home is valued at $200,000 and your mortgage balance is $100,000, you have $100,000 of equity in your home. Let’s say you want to spend $50,000 on renovations. You can refinance your loan for $150,000, and receive $50,000 in cash at closing.
If your loan is not government-backed, you will need to produce all of the standard documentation. Review this checklist to make sure you have all of the required documents to apply for mortgage refinancing.