If you want to determine the cash-out refinance in an easy way, use our calculator from the comfort of your own home. This tool can be very helpful to you if you’ve recently taken out this type of loan. Also known as mortgage cash-out refinance, this metric allows you to compare the cash-out refinance with the original loan. In the event of a larger loan balance, you’ll be able to get the difference.
In this article, you can find out more about the cash-out refinance, learn how to estimate it using our calculator, and much more. We will cover everything you need to know about cash-out refinance before making up your mind. Let’s jump right into it!
Cash-out Refinance Loan: What’s That?
If you plan to take out this loan, then you need to know some facts about it beforehand. Maybe you are already approved for a cash-out refinance. So, what is it?
This financial transaction is intended to replace the current mortgage or home loan so that balance is larger than the existing debt. As a matter of fact, a cash-out refinance loan is a home loan that allows you to take out the equity in your home and use it for other purposes. So this type of refinancing is geared toward homeowners who have equity in their property. Bear in mind that your lender will need to approve the loan and its terms before it can be finalized.
The main benefit of a cash-out refinance is that you can use the money for anything you want. That said, the difference in money can be taken and spent on different financial needs, including debt consolidation and home improvements. It can also be used to pay off credit card debt or car loans. Besides, you can use it to purchase a new car, go on vacation, remodel your kitchen, take care of other expenses, or even buy a new home. Many people also use this cash for investments like stocks, bonds, or mutual funds.
What’s the Difference Between HELOC (Home Equity Line of Credit) and Cash-Out Refinance?
When getting equity out of a home, there are various options to choose from. While some people prefer home equity loans, others would rather opt for cash-out refinance loans. We have seen the main characteristics of the cash-out refinance. But what is HELOC?
A home equity line of credit is a type of loan that allows you to borrow cash against the equity in a house you’re looking to buy. The amount that can be borrowed depends largely on the value of your home and the interest rate. Home equity lines are available from most banks, credit unions, and other lenders. They are also known as HELOCs.
Now that you know more about a home equity line of credit (HELOC), let’s explore the main differences between it and cash-out refinance.
The way of receiving the cash
A lump sum is received when closing the loan when it comes to cash-out refinance. Then you take out a new loan, thereby repaying the original mortgage besides paying transaction costs. Cash-out is actually the money that remains, and it can be used for whichever purpose you like.
HELOC, on the other hand, lets borrowers withdraw funds throughout their draw period (it takes ten years in most cases). You will receive money from the credit line at your disposal. However, you will start making payments on a monthly basis over this period. Once the draw period ends, your repayment period will start. During this new period, you’ll keep repaying your loan and will not be capable of withdrawing funds anymore. The outstanding balance should be repaid in 20 years.
Loan terms
A home equity line of credit is regarded as an additional loan, meaning its repayment schedule and the term is different from the existing (original) mortgage. Remember that you will be able to apply for it even if you don’t have a mortgage. You can take it out after paying for your home.
As far as cash-out refinance is concerned, the original mortgage is paid off through a completely new loan that features a different amortization schedule. Note that your mortgage payment structure will be determined by this new loan. This will change the way you repay your mortgage and make monthly payments.
Interest rates
When it comes to cash-out refinancing, there are two options: you can go for either adjustable-rate or fixed-rate mortgage. The interest rates are variable when applying for a HELOC, and they move in lockstep with an index.
Closing costs
Another thing that makes a difference is the cost of closing. While HELOC generally doesn’t have any closing costs associated (or they are very small), closing costs will be significant when you’re going for cash-out refinance. In the second case, expect to pay as if you were closing on a mortgage loan.
How to Calculate Cash-Out Refinance
The formula is as follows:
Cash-Out Refinance = (Home Value * LTV Ratio) – Mortgage Value
For example, if the home value is $200,000 while the existing mortgage value you owe is $100,000 and the maximum LTV ratio is 80%, then Cash-Out Refinance = (200,000 * 0.8) – 100,000 = $60,000.
So, when calculating a cash-out refinance, you need to consider the following things:
- The current loan you want to refinance, and
- Loan refinancing details (like the origination fee, new loan term, and new interest rate).
FAQs
What’s the Maximum Amount You Can Cash Out?
When it comes to cash-out refinancing, LTV (loan-to-value ratio) can go up to 80 percent of the home value. This is the maximum amount you can get when taking out a new loan to pay off the original mortgage on a house. For instance, if you’re looking for a home that’s worth $200,000, you’ll be able to borrow a maximum of $160,000.
Are There Any Taxes When Getting a Cash-Out Refinance?
No. You will not be required to pay any tax because a cash-out refinance isn’t income but a type of loan. Nevertheless, you may lose some tax deductions. This depends on the way the cash is used.