Cash out refinancing is a type of mortgage loan where you replace your existing mortgage with a larger mortgage and keep the difference.

To put this in numbers, let's say you purchased your home for $500,000 and used a mortgage to borrow $400,000 (with the remaining $100,000 coming from a down payment). If after several years you still owe $300,000, you can refinance to a new mortgage with lower cash out refi rates and receive $350,000. Of this money, $300,000 will become your new mortgage and you'll make monthly payments based on your new cash out refinance rates. The remaining $50,000 is a cash out mortgage refinance loan and you'll begin making monthly payment installments on this amount.

The average rate on a 30-year fixed-rate mortgage in 2020 was 3.38%. If we look back 10 years, the average was 4.67% and if we look back even further to 2001, 20 years ago, the average 30-year fixed rate was over 7%. A Freddie Mac survey from March 2020 found that borrowers who refinanced their 30-year fixed-rate mortgage to a similar 30-year fixed-rate saved over $2,800 in annual mortgage payments (Source).

With these numbers alone, it's easy to see the pros of cash out refinance, as you can not only borrow money but also potentially save money. Furthermore, by using your home's equity as collateral, you'll be able to borrow money at much lower cash out refi rates when compared to a typical personal loan.

The main disadvantage of cash out refinance is that the new lien on your home will apply both to the new mortgage amount and the amount of money you borrow. This means that your home is used as collateral for the loan and if you do not make payments, your home could be foreclosed. If you are looking for an unsecured loan, you're better off comparing personal loans here here.

While there are many benefits to cash out refinance, the process isn't free and typically costs between 2% to 6% of your loan amount, depending on several factors including your location, credit score, amount of equity, loan size, and more. Lenders will also look at the type of mortgage you have as well as its current terms.

There are also other fees associated with refinancing and these can vary from lender to lender. In some cases, homeowners might be exempt from one or more of these fees but it is important to know refinancing does cost money and you should be prepared to have this money upfront. To tweak an old saying; it takes money to save money. Some common refinancing fees include:

• Application fee: $75 to $500
• Origination fee: Up to 1.5% of loan amount
• Credit report fee: $30 to $50
• Home appraisal: $300 to $400
• Home inspection: $300 to $500
• Flood certification fee: $15 to $25
• Title search and insurance fee: $400 to $900
• Recording fee: $25 to $250
• Reconveyance fee: $50 to $65

Initially, when shopping around for cash out refinancing options, you will only need to provide a few personal and financial details such as the type of home you currently own, the location of the home, the amount of equity you own, and how much cash out refi you'd like to borrow. Once you apply, you'll need to provide documentation of your current mortgage and additional information about your financial information and income.

Unlike a cash out refinance, a home equity loan does not involve taking out a new mortgage (the refinancing part) and instead involved borrowing money using only your built-up home equity. There are two basic types of home equity loans: the classic fixed-rate fixed-amount home equity loan, and the more flexible home equity line of credit loan, also known as a HELOC.

A typical home equity loan is similar to a personal loan in that the loan amount is determined at closing and the APR is a fixed rate over a fixed amount of time. Typically, rates start around 4% and can go up to around 15%, though this can vary from lender to lender. The length of the loan can also vary by lender, but looking at Figure, they offer term lengths of 5, 10, 15, or 30 years.

Alternatively, a HELOC loan is the more flexible option and is similar to a credit card, where you can draw funds as needed and pay them back over time. Typically, there is a draw period of 5 to 10 years during which you can borrow funds up to a pre-determined maximum amount, followed by a repayment period of 10 to 20 years during which draws are no longer allowed. The major advantage of a HELOC loan is that you can draw only what you need and only pay interest on the amount you actually use. On the flip side, the interest rate on a HELOC loan is variable and can change over time. Furthermore, a lender can freeze or cancel your HELOC loan at any time and leave you without the funds you need. While this is an unlikely scenario, it's something to be aware of especially if the money is required by a certain date.