Cash out refinancing (in the case of
real property
In English common law, real property, real estate, immovable property or, solely in the US and Canada, realty, is land which is the property of some person and all structures (also called improvements or fixtures) integrated with or aff ...
) occurs when a
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...
is taken out on property already owned, and the loan amount is above and beyond the cost of transaction, payoff of existing
liens, and related expenses.
Definition
Strictly speaking, all refinancing of debt is "cash-out," when funds retrieved are utilized for anything other than repaying an existing loan.
In the case of common usage of the term, cash out refinancing occurs when equity is
liquidate
Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redist ...
d from a property above and beyond sum of the payoff of existing loans held in lien on the property, loan fees, costs associated with the loan, taxes, insurance, tax reserves, insurance reserves, and in the past any other non-lien debt held in the name of the owner being paid by loan proceeds.
Example of cash out refinancing
A homeowner who owes $80,000 on a home valued at $200,000 has $120,000 in equity. This equity can be liquidated with a cash-out refinance loan providing the loan is larger than $80,000.
The total amount of equity that can be withdrawn with a cash-out refinance is dependent on the mortgage lender, the cash-out refinance program, and other relative factors, such as the value of the home.
.
Differences between Cashout Refinance and Home Equity Loan
* A home equity loan is a separate loan on top of a first mortgage.
* A cash-out refinance is a replacement of a first mortgage.
* The interest rates on a cash-out refinancing are usually, but not always, lower than the interest rate on a home equity loan.
* The borrower pays the mortgage refinance closing costs.
* Generally, the borrower does not pay closing costs for a home equity loan.
*
Closing costs
Closing costs are fees paid at the '' closing'' of a real estate transaction. This point in time called the ''closing'' is when the title to the property is conveyed (transferred) to the buyer. Closing costs are incurred by either the buyer or ...
can amount to hundreds or thousands of dollars.
Related topics
The opposite, "rate-and-term" refinancing, occurs when a better note rate, better loan terms, or both become available to an owner which restructures their debt portfolio as it relates to liens held against a subject property. Consolidating multiple loans into one loan without extracting cash is also a rate-and-term.
Loan-to-value limits, and other factors in loan approval determine how much cash can be taken out from the equity of any one property.
See also
*
California Proposition 13 (1978)
Proposition 13 (officially named the People's Initiative to Limit Property Taxation) is an amendment of the Constitution of California enacted during 1978, by means of the initiative process. The initiative was approved by California voters on ...
,
U.S.
*
Real estate bubble
A real-estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real-estate markets, and typically follow a land boom. A land boom is the rapid increa ...
*
Inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
*
Home equity
Home equity is the market value of a homeowner's unencumbered interest in their real property, that is, the difference between the home's fair market value and the outstanding balance of all liens on the property. The property's equity increas ...
Mortgage
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