Lesson 22 of 25 · 6 min
Cash-out refinancing
Cash taken against a house you still live in raises the loan while the denominator stays put.
Cash-out refinancing writes a larger new loan than the old remaining balance, pays off that old balance, and delivers the difference as cash. The house is still the house you live in. The denominator of LTV does not move on the day the cash is taken. The numerator does. Track 1 lesson 6's ratio rises because the loan grew and the collateral did not.
Marrow Street Mortgage marks the house at $412,000. Existing balance $248,600. Cash taken $40,000. Costs $5,800. New balance is $248,600 + $40,000 + $5,800 = $294,400. LTV is $294,400 ÷ $412,000 = 71.5 percent. Cushion in dollars, the mark minus the loan, is $412,000 − $294,400 = $117,600. Before the cash-out the cushion was $412,000 − $248,600 = $163,400. The $40,000 plus the $5,800 reduced the cushion by $45,800.
The house now sits behind other spending. The $40,000 did not buy more house. It was taken against the house and spent elsewhere, so the collateral that remains is the same roof with a larger claim on it. Lesson 21's break-even identity can still be computed on the two payments. This lesson is the capacity identity: larger numerator, same denominator, thinner cushion.
A securities-backed draw does the same thing to LTV: more loan, same pledged account, unless prices moved. Cash-out is that draw with a house as the account, and with the added fact that the collateral is also the place you sleep. The ratio does not care about that fact. The arithmetic is still loan over mark.
Cash taken is a larger numerator on an unchanged house. The $40,000 is now other spending with the roof behind it.
Key terms
- Cash-out refinancing
- A new loan larger than the old remaining balance, with the difference delivered as cash against a house you still live in.
- New balance
- Old remaining balance plus cash taken plus costs. Here, $294,400.
- Cushion in dollars
- Mark minus loan. Here, $117,600 after the cash-out, down from $163,400.
Worked example
Forty thousand against an unchanged $412,000
Marrow Street Mortgage. House marked $412,000, existing balance $248,600, cash taken $40,000, costs $5,800.
- New balance
- $294,400
- LTV
- 71.5%
- Cushion after
- $117,600
- Cushion before
- $163,400
- What the $40,000 bought
- Not more house
$248,600 + $40,000 + $5,800.
$294,400 ÷ $412,000.
$412,000 − $294,400.
$412,000 − $248,600.
Other spending, with the same roof behind it.
The denominator stayed $412,000. The numerator rose to $294,400. Loan to value moved because Track 1 lesson 6 said it would.
Check yourself
House marked $318,000, existing balance $186,400, cash taken $28,000, costs $4,200. What is the new balance, the LTV, and the cushion in dollars?
Cash-out is borrowing against an asset you still live in, raising loan to value the way Track 1 lesson 6's ratio moves when the numerator grows and the denominator does not. Open Loan to value, and how to compute it →
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.