You’ve probably heard the term “cash-out refinance” before. Maybe your neighbor used one to pay for their new deck or your sister took one out to cover your nephew’s first year of college tuition.

Whatever the reason, you know that cash-out refinances exist — and that they can help pay for things like home renovations, education costs, existing debt, and other unexpected expenses that might crop up.

How do they work, though? And are you eligible to use one yourself? Those questions you may be less clear on — and we’re here to help.

Cash-out Refinance Basics

At its simplest, a cash-out refinance is a new mortgage loan — just a bigger one than you have on your home currently.

Here’s how it works:

  1. You take out a new loan in a larger amount than your current balance. As a general example, say you have $50,000 remaining on your current mortgage. You might take out a $100,000 loan in a cash-out refinance.
  2. You’ll take the difference between those two loans in cash. In the above example, that’d be $50,000.
  3. Use those funds to cover whatever expenses you need — pay off debt, remodeling costs, tuition, medical bills, etc. There’s no limit to what you can spend your cash on.
  4. Continue paying off your new mortgage loan month after month, just as you were doing before. Keep in mind your payment may be slightly different than before, depending on the rates and terms offered by your lender.

Cash-out refinancing is usually best used when you’ve built up a good amount of equity in the home — meaning you’ve paid off some of your existing mortgage loan and you own a decent chunk of the property yourself. In the grand scheme of things, the more home you own, the more cash you can access via refinancing.

Other Things to Know About Cash-Out Refinances

Refinances are processed just like your initial mortgage loan was. You’ll need to apply, prove your income and employment, provide various financial documentation, and have your credit report pulled. All of these factors will influence the amount of money you can take out, as well as the interest rate your new loan will come with.

Another important thing to keep in mind is that you don’t have to use your existing mortgage lender when refinancing. If you’re considering a cash-out refinance, make sure to evaluate all your options. There may be a lender with better customer service, better rates, or better terms than your current lender offers.

Thinking of refinancing? Talk to a loan officer at Embrace Home Loans about what options may be available to you.