Mortgage Refinancing: Cash Out or a Straight Refinance?

Posted on: 23 September 2020

When you buy a house with a mortgage, you do not own the house until you make the last payment. You build equity in the home over time, though. While you have a mortgage, you can refinance it at any time. When you do this, you can do a straight refinance or get cash out of your equity. What is the difference between these two options, and which option should you choose? Here are several vital things to know as you determine which refinancing to do.

1. How Basic Refinancing Works

Basic refinancing of a home loan involves getting a new loan to pay off your existing loan. The new loan you acquire is for the amount you currently owe on your mortgage loan and fees. You will encounter fees when refinancing, and you should find out how much these are before going through with it. It is essential to keep the loan long enough to pay for the extra fees you must pay. In other words, you should not refinance every year, simply to get a lower interest rate. You must only do this when it makes financial sense. A mortgage lender can help you understand how this works.

2. How Cash-Out Refinancing Works

The other option is a cash-out refinance. When you choose this option, you get a new loan to pay off your existing one, but the new one is for a higher amount. The new loan is a higher amount because you are not simply replacing your existing loan. You are also taking cash out of the home's equity. As a result, you will have to borrow more money on your new loan. Lenders have rules relating to cash-out refinances. They might only allow you to use this option if you have a specific amount of equity in your home. Most lenders base this on a percentage, so ask your lender about your specific circumstances. 

3. How to Choose the Right Option

Now that you know the differences between these two options, you may or may not know which is right for you. The only question you need to answer is whether you need cash out or not. If you do not need cash out of your equity, choose a basic refinance. If you need cash out or would like to learn more about your options, reach out to a mortgage refinance lender about taking a cash-out refinancing.