A cash-out refinance is a mortgage refinancing option that lets you convert home equity into cash. A new mortgage is taken out for more than your prior mortgage balance, and the difference is paid to you in cash.

In the real estate world, refinancing, in general, is a prevalent method for replacing an existing mortgage with a new one that typically extends terms to the borrower that are more favorable. By refinancing a mortgage, you may be able to lower your monthly mortgage payments, negotiate a lower interest rate, renegotiate the periodic loan terms, and remove or add borrowers from the loan obligation. In the case of a cash-out refinance, access cash from the equity in your home.

The process for a cash-out refinance is analogous to a rate-and-term refinance of a mortgage, in which you replace your existing loan with a new one for the same amount, usually at a lower interest rate or for a shorter loan term or both. In a cash-out refinance, you can do the same and also withdraw a portion of your home’s equity in a lump sum.

You tend to pay more interest after completing a cash-out refinance because you’re increasing the loan amount, and like other loans, you’ll have to pay closing costs. Otherwise, the steps to do this refinance should be similar to when you first got your mortgage:

• Apply after selecting a lender
• Provide the necessary documentation
• Wait for approval
• Wait out the closing

A cash-out refinance can provide several financial benefits and may present advantages over a personal loan or second mortgage. Here are some reasons to consider a cash-out refinance:

Fund Home Improvements And Renovations

Upgrades are often necessary, from questionable design choices to a broken HVAC system. A cash-out refinance allows you to use the equity earned to fund home improvements.

Consolidate Debt

A cash-out refinance can provide you with the money you need to pay down your debts and transfer what you owe to one suitable, lower-interest payment.

Get A Lower Interest Rate

If you put an unplanned bill on a variable credit card, you might pay a high amount of interest – the prime rate tied to the federal funds rate set by the Federal Reserve, plus a specific number of percentage points. Mortgage and refi rates usually are lower than credit card interest rates – often significantly lower. If you have enough equity in your home to cover your bill, you may save thousands in interest over time.

Free Up Money To Invest

Considering the power of compounding interest, it can be an intelligent move to free up money and save toward retirement early instead of keeping your funds tied to your home. Cash-out refinances give you access to funds that you can use to boost your retirement savings or build up a college fund.