Cash-Out Refinance.

In plain English

A cash-out refinance replaces your existing mortgage with a new, larger loan and gives you the gap between the two in cash at closing. You are turning home equity (the part of the home you actually own) into spendable money, and your home is the collateral. Lenders usually cap how much you can take out, commonly leaving at least 20 percent of the home's value as equity. The cash is not free money: you owe it back with interest, and your monthly payment or loan term usually grows.

01Why it matters

It can be a low-rate way to fund a big expense like a remodel or to pay off high-interest debt, but you are putting your house on the line for money you might otherwise borrow unsecured.

02The math, step by step

Say your home is worth 400,000 dollars and you owe 200,000 dollars. A lender that allows you to borrow up to 80 percent of the value would let your new loan reach 320,000 dollars. You pay off the old 200,000 dollar balance and walk away with about 120,000 dollars in cash, minus closing costs. Your new mortgage is now 320,000 dollars at whatever rate you locked. On a conventional one-unit home, cash-out refinances are generally capped at 80 percent of the value.

03What this is NOT

04Receipts

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