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TERMINOLOGY
A cash out refinance is a popular way to use equity in your home to pay for other expenses. A cash out refinance has tax benefits that other loans do not, so if you need to borrow money, this is often the smartest way to do that.
What Is a Cash Out Refinance?
A cash out refinance is a mortgage that allows you to withdraw the equity in your home. It is not a home equity loan, which is a second mortgage. This is a refinance of the entire first mortgage, which will change your interest rate and loan term. You can then withdraw the equity and use it however you wish, but commonly it is used to consolidate debt, pay for home repairs or pay for college. Lenders will have a cap on the amount of equity you can withdraw. Typically it will be between 80-95 percent of the loan, minus the mortgage balance. So, if you have a home worth $200,000 and you owe $120,000, and your lender allows you to withdraw up to 95% of the value, then you could withdraw $70,000 in cash at closing.
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