U.S. Mortgage Index

Cash-out refinance

Definition

A cash-out refinance replaces an existing mortgage with a new, larger loan and delivers the extra proceeds to the borrower in cash. The new principal is higher than the amount needed only to pay off the old loan.

In plain English

A refinance that only changes the rate or term may keep the unpaid principal close to what was owed. A cash-out refinance borrows more than that payoff amount so the borrower can take cash. The cash comes from increasing the debt secured by the home. It is not free money and not a home-equity line.

Technical definition

Fannie Mae’s consumer glossary describes a cash-out refinance as a refinance that pays the borrower cash above the amount needed to repay the existing mortgage.

Why it matters

Cash-out and rate-and-term refinances are reported and underwritten differently. Treating them as one product hides the extra lien amount.

Example

Sam refinances, pays off the current mortgage, and receives additional funds at closing. The new loan’s principal is larger than the old payoff. That extra amount is the cash-out feature.

Sources reviewed