Cash out refinancing occurs when a loan

Loan

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

 is taken out on property already owned, and the loan amount is above and beyond the cost of transaction, payoff of existing lien

Lien

In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...

s, and related expenses.

Definition

Strictly speaking all refinancing of debt is "cash-out", when funds retrieved are utilized for anything other than repaying an existing lien.

In the case of common usage of the term, cash out refinancing refers to when equity is liquidated from a property above and beyond sum of the payoff of existing loans held in lien on the property, loan fees, costs associated with the loan, tax

Tax

To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

es, insurance

Insurance

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

, tax reserves, insurance reserves, and in the past any other non-lien debt held in the name of the owner being paid by loan proceeds.

Example of Cash Out Refinancing

A homeowner who owes $80,000 on a home valued at $200,000 has $120,000 in equity. That equity can be liquidated with a cash out refinance loan providing the loan is larger than $80,000. The owner could use the refinance loan to pay off the original mortgage and could then pocket whatever money is left over.

The total amount of equity that can be withdrawn with a cash-out refinance is dependent on the mortgage lender, the cash-out refinance program, and other relative factors, such as the value of the home.

Related topics

The opposite, "Rate-and-term" refinancing occurs when a better note rate, better loan terms, or both become available to an owner which restructures their debt portfolio as it relates to liens held against a subject property. Consolidating multiple loans into one loan without extracting cash is also a rate-and-term.

Loan-to-value limits, and other factors in loan approval determine how much cash can be taken out from the equity of any one property.

See also

• California Proposition 13 (1978), U.S.
  United States
  The United States of America is a federal constitutional republic comprising fifty states and a federal district...
  
  
• Real estate bubble
  Real estate bubble
  A real estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets...
  
  
• Inflation
  Inflation
  In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
  
  
• Home equity
  Home equity
  Home equity is the market value of a homeowner's unencumbered interest in their real property—that is, the difference between the home's fair market value and the outstanding balance of all liens on the property. The property's equity increases as the debtor makes payments against the...