How Does a Cash-Out Refinance Loan Differ from Rate and Term Refinancing?
Both types of loans require taking out a new loan to pay off your existing mortgage. With a rate and term refinance loan you borrow the same amount that you currently owe. The goal of this type of loan is getting a lower interest rate, a different term, or both. With a cash-out refinance, your rate and term can still change, but the goal is to borrow more than you currently owe on your home and use the excess cash for something else.
How much of my home's equity can I get in a cash-out refinance loan?
Typically, lenders limit a loan to 80% of your home’s value. This still rule of thumb still applies to cash-out refinances. For example, if your home is currently valued at $300,000, and your current mortgage balance is $100,000, you can use the equity in your home to refinance your mortgage up to the full 80% or $240,000. By refinancing and borrowing $240,000, you will pay off your current loan of $100,000 and have an additional $140,000 to spend on renovations.