Refinancing: Traditional vs. Cash-Out
However, there are a different ways to refinance, depending on your cash needs.
A Traditional Refinance usually means replacing an existing mortgage with another one, usually with more favorable terms for the homeowner. This can come through a lower interest rate than the one originally on the mortgage, or with a longer term for repayment, so the payments are typically lower.
Essentially, the old loan is paid off by the new loan, and the new loan replaces it. You’re still responsible for the repayment.
With a Cash-Out Refinance, the new mortgage is larger than the balance on the previous mortgage, and you get the difference in cash. To be able to use this option, you need to have equity already built up in your home.
Cash-out refinancing details may be limited to 80% to 90% of the home’s equity. Often, the cash difference owners receive through this sort of refinancing is spent on home improvements, debt consolidation, and other major cash needs.
Choosing What's Right for You
Everyone’s situation is different. When thinking about applying for a refinance, and which type you should choose, consider your goals for the money and how you’d need it to work for you. When contemplating the cash-out option, ask if the money will go toward something that offers a return on it, like how a renovation can increase a home’s value.