What is the difference between a Cash-out and Refi?

We get applications and inquiries daily, wherein folks use the terms ‘cash-out’ and ‘refi’ interchangeably. Sometimes it’s ‘cash-out refi’. But there is a difference between the terms, and learning precisely what they mean will help you speak more clearly with a potential lender. More importantly, there may be different loan-to-value (LTV) limits to how much a lender will offer based on the type of loan you need.

When requesting a cash-out, you’re asking to pull equity, in the form of cash, out of your investment. For a traditional cash-out, you must own the property free-and-clear. The only limiting factors on the amount of the loan are the property’s value and the LTV that the lender will permit.

Now let’s say that you already have a loan on your property, but getting a new loan with different terms would benefit you. Perhaps the interest rate is lower, which will cut your monthly payments significantly. The new loan in this case is considered a ‘refi’ because it will refinance your existing debt. (Click the link for a textbook definition.)

The third scenario is one where you already have a loan on your property but your equity in the property has grown, typically because the property has appreciated. Now you can get an even bigger loan than the one you already have. This is a cash-out refi: because you’re simultaneously pulling more cash out of the property while refinancing the existing loan.

Remember, knowing what lenders’ terms mean is important. But knowing and understanding the difference between a cash-out, refi, and cash-out refi can be particularly important as they may impact how much a lender will permit you to borrow. Please let us know if there are any terms that confuse you, in the comments below, and we’ll do our best to explain them clearly.