What does the term "cash-out refinance" refer to?

The term "cash-out refinance" refers specifically to the process of refinancing a mortgage in order to borrow more than the outstanding balance on the current mortgage and receive the difference in cash. This approach allows homeowners to tap into their equity—the value of their home that is not encumbered by debt—providing them with funds that can be used for various purposes, such as home improvements, debt consolidation, or other expenses.

In a cash-out refinance, the borrower takes a new mortgage that is larger than the existing mortgage balance. For example, if a homeowner owes $150,000 on their mortgage and they refinance for $200,000, they receive $50,000 in cash after paying off the existing mortgage. This is distinct from refinancing solely for better loan terms or modifying the existing loan balance without extracting additional equity. Other options involve refinancing for different purposes, but they do not incorporate the aspect of receiving cash, which is what defines a cash-out refinance.