A cash out refinance is when a real estate investor or homeowner pulls a portion of the equity out of their property by implementing a new mortgage loan.
Let's say you own a property that you believe is worth $1,000,000 and your current mortgage loan balance is $250,000 with an interest rate of 5%. This means, pending the result of an appraisal, you have roughly $750,000 worth of equity in the property. With interest rates at 3%, you see an opportunity to reduce your interest expense. You also realize you can access a portion of that equity so you can buy another investment property. So you go to a bank and tell them you want to refinance the property. The bank confirms that they can lend up to 75% LTV and they send an appraiser to appraise your house. The appraisal comes back at $1,000,000, which means the bank can issue you a new mortgage of up to $750,000.
You decide to refinance at 75% LTV and your refinancing bank pays off your original $250,000 mortgage loan and issues you a $750,000 mortgage loan at 3% interest. This means you receive $500,000 in cash ($750,000 - $250,000 original loan) and you have 25% equity in the property valued at $250,000. Using our mortgage calculator, you can see you will now be responsible for making roughly $3,500 in monthly PITI payments over the term of the new 30 year fixed mortgage loan.