Example of a cash out refinance
A case study on getting cash from home equity
Jenny and Eduardo are a married couple with two growing children. Eduardo works as a nurse and Jenny works as an insurance agent. Jenny has the opportunity to work from home but needs a better office in her home to do it. She’s been working from their dining room table for the past year!
Jenny and Eduardo decide to renovate their basement to make it an office. Because house prices in their neighborhood have been rising quickly, they think they have enough home equity to pay for their basement remodeling project.
First, Jenny and Eduardo figure out how much money they need
Jenny and Eduardo decided how much money they might need for their renovations. They talked about what they wanted, got recommendations for contractors, and got two estimates – both of which came in around $20,000. They decide to budget $25,000 for the renovations because there are often surprises and extra costs when you remodel your home.
Next, Jenny and Eduardo figure out how much money they can get
Jenny and Eduardo estimated how much money they might be able to borrow. They used a few real estate sites to estimate the value of their home and found the average was $360,000.
They checked their mortgage balance and found it was $225,000. They subtracted this amount from the current home value to estimate they have $135,000 in home equity ($360,000 - $225,000 = $135,000).
From their research, they learned that lenders don’t typically lend the full amount of a home’s equity. Instead they usually require to keep 20% of their equity in their home with a cash out refinance. Jenny and Eduardo used the Freedom Mortgage cash out refinance calculator to estimate how much they could borrow and found they might qualify for up to $63,000. Here's how the calculations work:
|Estimated Home Value||$360,000|
|Current Mortgage Balance||$225,000|
|Estimated Home Equity||$135,000 ($360,000 - $225,000)|
|Maximum New Mortgage Balance (keeps 20% equity in home)||$288,000 ($360,000 x 0.8)|
|Estimated Cash Available||$63,000 ($288,000 - $225,000)|
Next, Jenny and Eduardo talked to a loan advisor
Jenny and Eduardo called Freedom Mortgage and spoke to Monique, a loan advisor knowledgeable about cash out refinances. Monique asked what they wanted to accomplish with their loan and Jenny and Eduardo talked about their renovation plans.
Because they were current Freedom Mortgage customers, Monique was able to run a quick analysis of their mortgage and credit report.
When our Loan Advisors estimate your cash available, it may not be the exact same amount the calculator estimates in the event loan information changes and/or the information provided to the Loan Advisor does not match the information input into the calculator. In this case, Monique estimated Jenny and Eduardo might be able to borrow $60,000 , which is still more than enough money to cover their renovation budget.
Next, Jenny and Eduardo fill out an application
Monique explained to Jenny and Eduardo that they would need to fill out an application to get more loan information. Jenny and Eduardo agreed and Monique helped them right on the phone. Jenny and Eduardo confirmed that they wanted to borrow just $25,000 to cover the cost of their home renovations, even though they qualified to borrow up to $60,000.
Monique said she would need a little time to work on their loan plan and scheduled a follow-up call. When Monique called back, she had information about their new interest rate, monthly payment, closing costs, how much cash they would receive, and other details. Monique answered Jenny and Eduardo’s questions and asked if that plan sounded good. They said yes!
Next, Jenny and Eduardo get their application approved
For their next steps, Monique explained that Jenny and Eduardo would need to sign Initial Disclosures and upload copies of supporting financial documents to complete their application. Monique and other members of the Freedom Mortgage team made sure they knew what to do and how to do it.
Once this was done, Jenny and Eduardo’s application went to mortgage underwriting which reviewed their loan application. The underwriting department gave final approval to the application and Monique called Jenny and Eduardo with the good news. They’d been approved!
Last, Jenny and Eduardo close their loan and get their cash
For their final steps, Jenny and Eduardo signed their Closing Disclosures which confirmed the new rate, monthly payment, and other loan terms. They scheduled their closing date and Freedom Mortgage was able to bring their refinance documents to their home. Jenny and Eduardo reviewed these documents and signed them.
Three business days later, Freedom Mortgage deposited the $25,000 from their cash out refinance in Jenny and Eduardo’s bank account. Jenny called their contractor to say they could begin work on the renovation!
Last reviewed and updated June 2023 Freedom Mortgage Corporation.