What Is a Cash-Out Refinance?

There are two main types of mortgage refinances. There is the standard rate and term refinance, which allows a borrower to snag a lower mortgage rate or shorten their term, while keeping their existing balance intact. And then there is the “cash-out refinance,” which allows a borrower to tap into the equity in their home.

How does a cash-out refinance work?

When refinancing, if a borrower elects to take “cash out” in addition to their existing loan, the new mortgage balance will be larger than the original. That’s right, it’s not free money, even though you get cash in hand!

Once the refinance is complete, the new loan will consist of the original balance prior to the refinance plus the desired cash-out amount. So expect both the size of your mortgage and your mortgage payment to increase in return for cold, hard cash.

There are two ways a borrower can tap into their home equity. They can either open up a home equity line of credit, also known as a HELOC, behind their existing first mortgage, or refinance their existing mortgage(s) and take cash out.

[How does refinancing work?]

Let’s look at an example where a homeowner wishes to get $100,000 cash-out of their home:

Home value: $500,000
Existing liens: $300,000 (fancy way of saying current loan balance)
Home equity: $200,000

In the above example, the homeowner has an existing mortgage balance of $300,000. The home is currently worth $500,000, so the homeowner has $200,000 in home equity. In other words, the homeowner essentially owns $200,000 of their home, or 40% of the current property value. As mentioned, if the homeowner wishes to tap into that equity, they can either get a second mortgage (HELOC) or execute a cash-out refinance.

Let’s assume the homeowner opts to add a second mortgage via a HELOC:

Home value: $500,000
Existing liens: $300,000
HELOC: $100,000 (behind the 1st mortgage)
Home equity: $100,000

In the above example, the homeowner adds a second mortgage behind their existing $300,000 first mortgage. The $100,000 home equity line they added increases their existing loan balance to $400,000, and subsequently lowers the equity in their home to $100,000. But the homeowner now has a $100,000 credit line to use for whatever they wish, without changing the rate or term of the existing first mortgage. This is NOT a cash-out refinance.

Now let’s assume they execute a cash-out refinance by refinancing their existing loan and adding cash-out:

Home value: $500,000
Existing liens: $300,000
Cash-out refinance: $400,000 ($400,000 new 1st mortgage, no 2nd mortgage, $100k cash goes to borrower)
Home equity: $100,000

In this example, the homeowner refinances their original $300,000 mortgage and takes $100,000 cash out, creating a new $400,000 mortgage. The amount of equity and cash to the borrower are the same in this example. The only difference is that the homeowner still has a single loan, although a completely new mortgage with a fresh term and possibly a new interest rate, quite likely with a different bank or mortgage lender.

So which approach works best? When looking to execute a cash-out refinance, it’s important to decide which method makes sense for your unique financial situation. If interest rates are low at the time you’re looking to cash-out, you may want to refinance your existing mortgage and consolidate the old mortgage and cash-out into a single loan as we saw in the last example.

If mortgage rates aren’t favorable but you still need cash, it’d probably be best to leave your first mortgage alone and add a second mortgage behind it. That way it won’t affect the interest rate of the first mortgage.

Things like remaining term must also be taken into account. If your mortgage is close to being paid off, it may be wise to leave it untouched and opt for pulling cash out via a second mortgage. But if your mortgage is new and the interest rate is not all that favorable (or adjustable), it might make more sense to refinance the whole kit and caboodle.

Why do people pull cash out of their homes?

• Home improvements
• Other investments (stocks, bonds, etc.)
• Vacations and other luxuries
• College tuition
• To purchase another property
• To pay-off other higher-interest-rate debt, such as credit cards or auto loans
• For an emergency
• Because they want cash for any number of reasons

Many homeowners use cash-out refinances for debt consolidation, home improvement, or for future investments. To avoid paying high-interest rate credit cards, homeowners may use cash out to pay off those bills. Instead of paying a 20% interest rate or higher on a credit card each month, you can pay off that balance using your mortgage and pay a rate of 5-8% instead. Just realize the risk involved if you fail to make your mortgage payments.

Other homeowners may pull cash-out to make improvements to their home that will increase the value significantly, which over time can lower their loan-to-value ratio and increase the equity in their home.

Others may pull cash-out if they feel they can invest the money at a better rate of return than the mortgage rate.

The question you need to ask yourself is whether it makes sense financially to refinance your current mortgage to take advantage of anything mentioned above. Keep in mind that there are fees associated with taking out a second mortgage, and even more if you plan on refinancing your first mortgage and taking cash-out.

While a cash-out refinance can provide homeowners with much needed help in a dire situation, when you cash-out, you essentially reset the mortgage clock and lose all the equity you’ve spent years building. Not only do you lose your equity, but you also take on more debt.

Cash-out refinance Q&A:

What is the seasoning requirement for a cash-out refinance?

Most lenders will not let homeowners take cash-out on their property without 12-months seasoning. Meaning that if you buy a property, you’ll need to sit on it for at least a year before taking any cash-out. Lenders enacted tougher cash-out rules to deter investors from buying homes with zero money down, and quickly refinancing them at a higher value and taking cash out.

There are some lenders that will allow cash-out up to 75% loan-to-value without any property seasoning, but most homeowners who are looking for quick cash-out usually do not have 25% equity in their homes.

What is the max LTV for a cash-out refinance?

Seasoning aside, there are typically strict limits on how much cash out you can take.  At the moment, most lenders allow a max LTV of 85% for cash-out refinances.  In the “good old days,” you could get cash-out at 100% LTV, meaning you could take out a loan for the full value of your property.  Clearly this didn’t go well once home prices plummeted and lenders were stuck holding the ball.

Is my refinance considered rate and term or cash-out?

Another important note is that a refinance will be likely be considered cash-out if a borrower refinances a non-purchase money home equity line of credit. That is, if you open an equity line behind your existing first mortgage after the original purchase transaction and then later want to refinance it, it will be treated as a cash-out transaction even if you aren’t taking cash-out at that time. What this may mean to the homeowner is another pricing adjustment when they refinance, which will result in a higher interest rate. It’s not the end of the world, but something to consider.

Many borrowers also feel if they aren’t getting cash in their pocket, their refinance isn’t considered cash-out. This is false. If you pay off credit cards or auto loans and receive zero cash in hand, the bank or lender will still consider it cash-out, and it will be underwritten as such.

Is a cash-out refinance taxable?

NO.  As mentioned, you aren’t getting free money via the refinance transaction.  You are taking out a new loan with a larger balance and you must pay it back (with interest) over time.  So there’s no income tax to worry about.  However, you’ll likely have larger monthly mortgage payments to contend with.

Is a cash-out refinance tax deductible?

YES.  So we know the cash out isn’t treated as income.  But even better, it’s tax deductible, though there are limits of $100,000 ($50,000 if married filing separately). So if you pull $150,000 cash out, only the first $100,000 is fully tax deductible.

However, if $50,000 of that amount is used to improve your home (a new bathroom, kitchen renovation), that portion would be deductible via your “Home Acquisition Debt” and the remaining $100,000 would be deductible under your “Home Equity Debt.” So you could deduct everything, assuming you stay under the separate limits on the “Home Acquisition Debt” and otherwise qualify per the many IRS tax rules.  Speak with your CPA to be sure.

Can I get a cash-out refinance on a rental property?

Yes, though the LTV limits could be significantly lower.  We know the max LTV is around 80-85% for primary residences.  For rental properties, aka investment properties, you might be looking at a max LTV of 70-75%, or lower.  So keep that in mind before thinking you can tap all that equity!

Can you do a cash-out refinance with an FHA loan?

Yes, though the LTV limits are again restricted.  For FHA loans, the max LTV for a cash-out refinance is 85%, down from 95% before the mortgage crisis.  HUD lowered the max LTV as a result of deteriorating conditions in the housing market.  In other words, if home prices keep dropping and they continue to offer cash out up to 95% LTV, they’ll lose their shirt.

Will a cash-out refinance take longer to pay back?

With any mortgage refinance, it is important to understand the costs involved and the underlying motivation. You should avoid serially refinancing your mortgage if at all possible. Aside from the associated costs, you will set yourself back in paying off your mortgage, and wind up paying more interest than if you simply left the mortgage alone.

You could also land yourself in a negative equity position. That’s why a refinance should really only be reserved for times of great need, or in times when rates are simply too good to pass up. Do your homework (lots of it) before making a decision!

Tip: When to refinance a mortgage.


115 Comments

  1. Sherman July 8, 2013 at 2:12 pm -

    How much higher are mortgage rates for a cash-out refinance? Just curious if it’s worth tapping some equity.

  2. Colin Robertson July 9, 2013 at 8:56 pm -

    Sherman,

    It depends…there may be no hit for cash-out at a certain loan-to-value (LTV) or with a certain lender. However, the higher your LTV, the bigger the hit (and restriction) for taking cash out. Just shop around and see what’s out there.

  3. Roy July 12, 2013 at 9:32 pm -

    People using their homes as ATM machines and taking cash out is what caused this crisis. The banks should be more responsible and not let homeowners just continuously pull equity without any consequence. They should limit LTVs for cash out loans to some really low number where it will never be an issue.

  4. Demi July 14, 2013 at 11:27 am -

    I refinanced recently, and the pricing was the same whether or not I took any cash out, but I have a ton of equity in my home. I was looking at a LTV of 60% or less depending on if I took cash out or not. But I think for LTVs over 65-70%, they start adding pricing adjustments. But if you need the money, you have to pay the price.

  5. Laura July 22, 2013 at 3:22 am -

    Does anyone know of a lender that will allow cash-out above 90% LTV? I need to refinance, but I can’t find a bank willing to go that high.

  6. Zack July 23, 2013 at 2:26 am -

    After home prices increased, I wanted to cash out some of my home equity, but all the lenders I’ve spoken with say the max LTV is 80%. So in reality, even though I am not underwater anymore, I can’t actually use the money in my home. This is nonsense.

  7. Lavonda August 21, 2013 at 5:06 pm -

    There’s a reason banks aren’t allowing high LTVs on cash-out refis…they don’t want to repeat the same crisis all over again, especially if home prices don’t hold up this time around. These types of loans were the reason homeowners got underwater in the first place.

  8. Kevin September 14, 2013 at 8:04 pm -

    Just be patient folks. Now that the refinancing boom has died off, lenders will ease guidelines to ramp up business. Expect higher LTVs on cash-out loans in the near future.

  9. Toney February 18, 2014 at 5:52 pm -

    What is the max LTV for cash out on an investment property? It is a single-family residence.

  10. Colin Robertson February 19, 2014 at 5:18 pm -

    Toney,

    You’re probably looking at a max LTV of 80% when pulling cash out on an investment property. Some lenders might be lower/higher than that number, but the days of 90-100% cash out are behind us.

  11. Shawn March 5, 2014 at 9:14 am -

    So it occurred to me that you receive money when you do a cash out refinance. That being said, is a cash out refinance taxable? Does the government want you to pay taxes in the year you completed the refinance?

  12. Colin Robertson March 7, 2014 at 10:21 am -

    No, a cash out refinance is NOT taxable, but it can be tax deductible, just like other mortgage debt. In other words, when you pull cash out of your home, you’re simply tapping existing home equity and creating debt, so it’s not “income” in the pure sense. It’s creating liquidity, but with a loan attached, as opposed to just receiving money scot-free. And because it’s new mortgage debt, it may be deductible up to a certain amount as well. So you could actually get some tax relief via a cash out refi.

  13. S March 23, 2014 at 2:24 pm -

    Colin, thanks for information. As to the reference in above post, you note that there is 80% LTV possible on residential investment property. I talked to mortgage broker about this and they say on investment properties one could not expect more than 70& LTV. Do you any lenders who do the 80% LTV for single family investment properties. Thanks

  14. Colin Robertson March 23, 2014 at 3:33 pm -

    Hey S,

    I originally wrote this back when such an LTV was possible, and it could well be again in the near future as lenders react to falling refinancing volume by loosening guidelines. Speak to several brokers, banks, and credit unions to see if anyone will go as high as 80%. One broker may not work with the bank that offers such financing, but another might, assuming it’s out there.

  15. Anthony March 28, 2014 at 2:36 pm -

    Colin,

    last month I got my name on title. The loan is $40K on the house and want to pull some cash out to put money back in my pocket after remodel. House appraised at $155K. Are there any lenders out there that would help pull $ 50K out?

  16. Colin Robertson March 28, 2014 at 3:23 pm -

    Typically you need to be on title for at least six months before pulling any cash out, but there might be lenders out there willing to work with you, though they may charge a higher interest rate for that convenience.

  17. Sean April 1, 2014 at 7:40 am -

    I own my house outright…no mortgage. I want to demolish my existing house and build a new one in its place. The cost to build the new house is $70K more than the existing house is worth. Can I do a cash-out for the value of my house plus the extra $70K, demolish the existing house and build the new one using the cash-out loan? Is this illegal?

  18. Colin Robertson April 1, 2014 at 10:29 am -

    This sounds more like a construction loan situation. If a lender provided cash out, they would be extending financing based on their interest in the existing structure, which if knocked down, changes the entire picture.

  19. Sean April 1, 2014 at 11:34 am -

    Colin, thanks for the reply. That’s the sense I was getting but is it illegal to do it? I know it’s probably unethical to do but would there be legal ramifications if I decided to do it? Do you know? Thanks.

  20. Colin Robertson April 1, 2014 at 12:17 pm -

    Not sure about legality, but the lender might be able to call the mortgage due if you tear it down.

  21. Sean April 2, 2014 at 11:41 am -

    Gotcha. OK, thanks for the info Colin. Appreciate the help.

  22. maria May 27, 2014 at 12:51 pm -

    What’s the latest on cash out refinances with regard to the borrowers other existing debt?
    I hear for VA/FHA loans existing credit cards need to be paid off (which would be fine) but also CLOSED??

  23. Colin Robertson May 27, 2014 at 3:19 pm -

    Maria,

    I haven’t heard that. Are you talking about credit card accounts that are in collection status? Not sure why a lender would have you close an account that can be easily reopened after receiving your loan.

  24. Nancy Imbrescio May 28, 2014 at 12:15 pm -

    looking to take a HEL or cash out refinance.. but, I’ve only got 5 more years on mortgage (at 5.75%) and I need to take out 35,000 to pay off student loans for son. (doing this only because I think the interest is will be better than Sallie Mae, etc..).. not sure I want to refinance my 1st mortgage

  25. Colin Robertson May 28, 2014 at 12:51 pm -

    Nancy,

    If you’ve only got 5 years left on the loan, the majority of the payment each month is going toward principal (since you already paid most of the interest due) so you might want to look at the equity line/second mortgage route as an alternative.

  26. Kenneth Powell June 2, 2014 at 5:11 pm -

    Mr. Robertson.
    I have currently own a home that I have lived in for over 2 years, with no mortgage. (paid cash 4 ) Value 180,000/200,000. Problem is credit scores r 640 / 613 . I would need to pull 50,000. out. Qualified with good ratios. Need to pay property taxes & a IRS Lien (3500.00) and kid’s student loans. Is there any HOPE, or sell the home that I grew up in,
    Thank you
    (I hope that you have a solution for my problem.

  27. Colin Robertson June 2, 2014 at 7:25 pm -

    Kenneth,

    I’m assuming you have three credit scores but I don’t what they all are. They use the midscore so you might be OK. There’s certainly hope because your LTV will be very low, around 25% or so, though you might want to work on improving your credit scores a bit before applying to get a more favorable interest rate and to expand your available lender options. That’s if you have some time, otherwise you might have to accept less favorable terms.

  28. Dee June 23, 2014 at 9:36 am -

    I built my home 5 years ago. It is appraised at 375,000, I owe 210,000. However, over the last 2 years, our income has gradually declined and now 3 months ago, my husband lost his job of 26 years because it closed. Although he has another job now, we are still limited on the income. I’m wondering if theres anyone who does a HELOC to pay off all other debt and focus on mortgage, or should I do a Loan modification that I keep getting calls to do?

  29. Lourdes August 29, 2014 at 6:23 pm -

    Mr. Robertson,
    We refinanced a few times with a total of $150K cash out. $50K of that was in 2013. The way I understand is that over $100K needs to be for home improvement.

    How long do we have to prove the IRS for home improvements with the $50K before having to pay taxes?

    We are not planning to sell our home for a long time. And of course we did the cash out without knowing the tax implications until recently.
    Do we show the $50K as income in the 2013 tax report?
    Thank you

  30. Colin Robertson September 2, 2014 at 12:40 pm -

    Lourdes,

    It sounds like you’re referring to the deductibility of the mortgage interest. A loan isn’t income, it’s a loan. But you need to contact your tax preparer or CPA to sort it out.

  31. Lourdes September 3, 2014 at 6:51 am -

    Mr. Robertson,
    Yes, we will get a CPA to make sure what are our options.
    thanks for your prompt reply.

  32. Gloria September 7, 2014 at 11:24 pm -

    Hi Mr. Robertson,
    We are in the process of refinancing our home for $200,000. Our first mortgage has a balance of $57,000 @5% which will be paid off June, 2016 and a heloc equity loan of $97,500. Our home appraised for $774,000. The problem is, we co-signed on our son’s condo which is added to our debt, so our debt to income ratio is high. The mortgage Co. we are working with now wants to pay off our 2 mortgages and our 2 car loans and give us what ever is left out of $200,000 for bathroom improvements. Is it better to pay off our car loans from our savings/401K/Roth IRA?

  33. Colin Robertson September 8, 2014 at 8:52 am -

    Gloria,

    If you use the cash out to pay everything off, you can always pay down your low-rate mortgage (whenever you want) using savings or other cash. So in a sense it gives you more flexibility. But that’s your decision.

  34. Amanda October 6, 2014 at 10:01 am -

    We have a first mortgage of 20,000. that will be paid off 3/16 and a second mortgage line of credit. Currently we owe 50,000. on the second. The home is valued at 450,00. and we want to do a cash out for 120,000.00 which will bring the combined mortgages to around 200,000.00 (including the cash out).
    That being said we have an old 401k worth 135,000. that we have thought about cashing out (realize the penalties and taxes). We have a new 401k that we max out in donating too and a retirement plan that we pay into, not to mention we are also part owners in the company. We are in our late 40’s.
    So the question is which is best a refi or to take the old 401k?

  35. Colin Robertson October 6, 2014 at 10:28 am -

    Amanda,

    You’ll have to do the math and look at the implications of both and your financial/retirement goals to determine what’s best for your particular situation. I assume most financial advisors don’t recommend pulling from a 401k early, but to each their own. Also, mortgage rates are still pretty darn low, so that could sway a decision.

  36. Al October 13, 2014 at 5:22 pm -

    I have just completed a home improvement work using a low interest credit line for over $100K, if I refinance this credit line with cash out will it all be tax deductible (even if the home improvement has been completed at the time of the cash out)? In other words, is there any timing restriction for the home improvement work wrt cash out time.

    Thank You

  37. Colin Robertson October 13, 2014 at 9:39 pm -

    Al,

    You can deduct mortgage interest as you pay it. If you refinance you’re not paying interest, you’re just replacing one loan with a new loan and paying interest on that loan eventually. But consult your tax man.

  38. kingsley October 29, 2014 at 3:34 pm -

    Hi colin, i am thinking about refinancing my home and getting a cashout of 50k the home was appraised for 480k and am currently owing 300k on the property. When i looked at refinancing to get a cash out my credit was 670 and my wife is 620 what will be your advice . Right now our interest rate is 3.89% will it be ok to open a heloc or do the cash out because i feel the interest rate will be higher since the bond buying has been closed.

  39. Colin Robertson October 30, 2014 at 10:32 am -

    Not sure what loan program you have now but I’ll assume 30-year fixed. Rates are pretty close to what you’ve got now, though your lower credit scores might push the rate you’ll be offered higher. You could do the HELOC to keep your first mortgage intact but the government may start raising rates (and prime will follow). HELOCs are adjustable so there’s risk there. But no one knows for sure if rates will really rise. They’ve been saying rates would rise for years now and nothing happened. That being said, there is a lot of comfort in a fixed rate, especially if you plan to stay in the property for a while.

  40. bob December 1, 2014 at 2:56 pm -

    Hi Colin- Great site! wondering what we should do to finance a major renovation (2nd story addition). We have 11 years left on the mortgage(3.375 / $185K mortgage / $425K home value). Housing values continue to skyrocket here in Denver. We’re growing our family and want to add a $300K addition. Should we cash out and add a HELOC to cover the construction? We will be paying 90K in cash, the rest will be financed. Credit is >800 . Thanks

  41. Colin Robertson December 1, 2014 at 5:05 pm -

    Hey Bob,

    So you’re looking at around 93% CLTV ($185k + $210k = $395k/$425k). It depends what kind of mortgage you have currently and what the refinance rate would be. Also, if you’re that far along into a 30-year mortgage, you’re paying mostly principal each month nowadays, not much interest. HELOC rates will probably rise soon as the Fed beginning raising rates and the prime rate follows. How much they go up and how quickly is another question. There are also fixed home equity loans with shorter terms (higher payments) available. Lots of options and required math, but getting that CLTV down to 90% should help in terms of rate and loan options.

  42. Sam February 1, 2015 at 7:30 pm -

    Hi Colin
    Great site, very educational.
    We were looking to buy a house worth 350.000. We have a down payment of 200,000. We had the idea of borrowing the remaining 150,000 money from our parents , purchasing the place for cash , and then asking for some type of home equity loan from a bank of 150,000 to pay back our parents after we close- We would want a loan with a steady payment schedule, and no prepayment penalty if possible. 2 questions : what type of loan would we want to get in this scenario, and is there usually a difference in interest rate between a traditional mortgage (obtained before purchasing) and a home equity loan (obtained after purchasing)
    Thanks ,
    Sam

  43. Colin Robertson February 3, 2015 at 12:21 pm -

    Sam,

    The downside to a HELOC is that the interest rate is variable, based on the prime rate + some margin usually. It’s currently set at 3.25%, so you could potentially get a 15-year fixed or another type of fixed loan at a lower rate with payments that are steady. You’ll have to determine if a fixed rate is better suited for your situation if the rates are fairly similar. The HELOC may have lower closing costs, but if the rate is higher, it may still be the more expensive option. You’ll also have to determine the max loan amount you can take out after buying your home in cash and consider any other eligibility restrictions such as seasoning, loan-to-value (LTV) limits, etc. In other words, making sure you can actually take out a loan right after you buy in cash.

  44. Betti February 11, 2015 at 1:47 pm -

    We did a refinance/cash-out loan over 10 years ago. We wanted to refinance again (loan balance is only ~ $63,000). I was told by the mortgage company that because we are in Texas, the legislature changed some of the refinance/cash out regulations and that the lenders are limited in what they can charge us regarding closing cost, fees, etc. I believe he said it was like 4% of the loan value. So the lender would be “out” much of the cost of the refinance. Do you know anything about this? I feel as though we are being penalized for taking a cash out loan years ago. We have tried to refinance before with our current lender (Chase) but we were turned down and never told why. Now I guess we know why.

  45. Colin Robertson February 11, 2015 at 3:50 pm -

    Betti,

    I know there are a lot of limitations on cash out in Texas, including a max LTV of 80% and a 3% cap on fees I believe. This makes it difficult for the lender to cover their costs and make money if your loan amount is really small. One way around this might be a home equity loan/line, though they too are limited in Texas, but could be easier to deal with fee-wise.

  46. Dee February 13, 2015 at 2:25 am -

    My house’s value is $750K. It has been paid off for 4 years now. I want to pull out $300K in cash equity and buy another house. The other house costs $775K. The seller on the other house will carry $475K until my current home sells and I will pay her off with the sale proceeds. My question is: What type of loan do I apply for? A cash out refi wont work because I am not “refinancing” anything because I currently don’t have any mortgage? I’ve heard that HELOCs take up to 60 days to get approved and the interest rates are much higher. I also have heard that there are penalties if you close them (which I would) and pay them off within one year. What should I try to do to get the best loan in my situation for $300K ?

  47. Colin Robertson February 13, 2015 at 7:42 pm -

    Dee,

    A mortgage on a property owned free and clear is considered a cash-out refinance, per agency guidelines. Might be best to speak to some brokers/lenders with regard to loan choice, but HELOCs often have early payoff fees, though the closing costs might be cheaper than a standard first mortgage. Gotta weigh the pros and cons. Some might even ask why you need a mortgage if you can sell your home and use proceeds to buy the new one.

  48. Patrick February 16, 2015 at 6:49 pm -

    Can someone answer me this. I have a 1st and 2nd mortgage. The 2nd mortgage was done 7 years ago and used t pay off student loan debt,thus it was a cash out refi. I am trying to refinance again but my LTV on the 2 mortgages together is roughly 89%. Will I be able to refi the 2 mortgages into 1 and pay PMI? I tried to refi a few years back and seem to recall running to this problem. I was told they couldn’t do above 85%. I would have to come out of pocket $15,000.

  49. Colin Robertson February 17, 2015 at 10:02 am -

    Patrick,

    Nowadays it’s possible to get one loan at around 89% LTV, depending on the circumstances. Shop around and see what you qualify for these days.

  50. John Rodgers February 25, 2015 at 8:28 am -

    We closed out an IRA during 2014 and deferred the penalty and some of the tax which now leaves us with a $14,000 tax bill to the IRS. Our mortgage has 3 1/2 years left on it at 4,75%, $42,000 balance, and $1630/mo. We have a HELOC opened in 2010 at 6.5% variable, $30,000 original balance (have only paid the $160 interest each month), and a couple of $10,000 credit cards at 12.99%. The home value is $185,000. Is a cash-out refi at 3.5%the best route or should we just try to pay the tax bill as best we can or is there another route?

  51. Colin Robertson February 25, 2015 at 11:25 am -

    Hi John,

    It’s really up to you and also what you qualify for. General options include refinancing just the HELOC, paying off the HELOC with a home equity loan, or refinancing the HELOC and first mortgage into one new mortgage at a lower rate. All have pros and cons. It should also be noted that a mortgage that is nearly paid off has payments consisting primarily of principal as opposed to interest.

  52. Sherri March 11, 2015 at 11:22 am -

    Hi Colin – I am trying to find the best way to gain money for a remodel on a house we have owned for 11 years. According to property value on Zillow – and the outstanding amount on the first (and only) mortgage, we have a 57.4% cost to value ratio. We also both have excellent credit and less than $2k/month in debt (including the current mortgage).

    My husband (with his parents as co-signers) bought our house in 2004 and has been renting out the main floor while living in the basement He has done approx. $20k worth of remodeling to the basement but has not touched the main floor yet. Our tenant moves out in 3 months and we are planning on opening the house back into a single family residence and gutting the main floor.

    The renovations to our walk-out basement added 2 legal bedrooms with egressed windows and closets. Our home is listed on Zillow as a 2 br. 2 bath with 1080 sq. ft. But we actually have a 4 br. 2 ba. with 2160 sq. ft. after the basement remodel.

    His parents think we should take out a second mortgage to finance the upstairs remodel which we’ve estimated to be about $75k worth of work. I have also been told that we should just take out a home equity loan in our names since his parents are still listed on the original note – and just keep that separate. But I’ve also looked at a cash-out refinance option as well as a Fanny Mae HomeStyle Renovation Mortgage. It is overwhelming.

    Ultimately, I want to know if we should have a new appraisal once we open the basement up to the main floor (it was originally appraised as a single family home, not a rental)? According to the current value of the home – we have enough equity to to the remodel without the appraisal. Would we value from that? And, what option would give us the best rates and easiest payment options? Thanks in advance for your help.

  53. Colin Robertson March 11, 2015 at 3:40 pm -

    Sherri,

    Assuming you qualify, you could potentially refinance the existing first mortgage, which would probably make more sense if the rate is high relative to current rates. But you have to keep in mind that you’ve paid into that mortgage for 11 years so extending the term is generally perceived as a negative. Conversely, there’s the second mortgage route, either a HELOC or home equity loan. The advantage being you don’t mess with the first mortgage and the closing cost might be lower, and the process perhaps less onerous. Probably best to sit down with a broker/bank or two to weigh options.

  54. Leigh March 26, 2015 at 6:15 am -

    Mr. Robertson,
    We currently have $35k (3 yrs) remaining on a $141k 15 yr refi @ 5.25%. Home value approx. $450k. Credit score excellent. Project needing $150k for tuitions and home repairs over next 3 years. Current payments are 85% principal so hate to refi, but uncomfortable with adj rates on HELOC and not that familiar with them in general. Want ability to pre-pay. Would you recommend refi or HELOC?
    Thank you

  55. Colin Robertson March 26, 2015 at 7:52 am -

    Hey Leigh,

    You said you don’t like variable rates, so potentially a home equity loan, not line, that is fixed. Do the math.

  56. WES April 8, 2015 at 3:23 pm -

    I have no mortgage, $90k appraisal and I am a month into a cash out refinance and it seems to be wait, wait , wait. But at least no bad news. What is the typical time frame? Or are there too many factors involved? I’m probably a little too impatient.

  57. Colin Robertson April 8, 2015 at 4:35 pm -

    Hi Wes,

    A refinance can certainly take more than a month depending on what’s going on in the industry, lender turn times, your particular loan details, and so on. Did you ask what the status was? It’s good to stay on your lender and check in fairly frequently to make sure it’s moving as it should. Good luck.

  58. mark galindo April 28, 2015 at 8:11 pm -

    Hi..I am trying to buy my parents house that was left to us five kids in a family trust..lending company suggest that I do a cashout refinance. house is paid off..and valued around $150,000…based off the concept that all five of us kids are 1/5th owner of the house now..and if I put my 1/5 th of my ownership as a down I can refinance the balance of home (say $120,000) and pay off the remaining four heirs..

    I haven’t owned a home in long time, lost home in divorce to ex wife 20 years ago..credit is “ok”..this is the way the lending company says best for my situation..any thoughts? I was told when loan done, then other four heirs would sign Quick Claim and then I would give them their money.

  59. Colin Robertson May 2, 2015 at 4:10 pm -

    Hi Mark,

    Might want to speak with your tax advisor or financial planner about all ramifications, but I suppose that is one way of doing it so everyone gets their money and you take on a loan yourself in order to acquire sole ownership. It’s a Quitclaim deed by the way.

  60. Trevor May 5, 2015 at 5:00 pm -

    I’m refinancing my first mortgage but I have two other HELOCs tied to this home. All combined, the LTV is about 100%. But, assuming my two HELOCs are subordinated, how does the bank view my LTV when refinancing my first mortgage. If you don’t consider the HELOCs, the LTV of this first mortgage that I’m refinancing is 71%, but the bank is saying my LTV is 100% so they want to raise the interest rate that I’ve already locked in. Thank you.

  61. Colin Robertson May 5, 2015 at 7:03 pm -

    Trevor,

    The lender should consider all liens against the subject property. It’d be convenient if they didn’t, but wouldn’t accurately measure the risk involved.

  62. Britney May 22, 2015 at 12:56 pm -

    Hi,

    Me and my husband recently purchased a foreclosure in a cash transaction so we do not currently have a mortgage. We are now finding out that there were way more problems and repairs than initially reported and we are now short on cash. I have heard a few things about a cash-out refi and a HELOC and a 203k but I’m not sure which would be the best choice. It is a little difficult finding info out here for people who do not currently have a mortgage and our credit is not that great (we both have a score around 620 – 640). Any advice would be great.

    Thanks

  63. Colin Robertson May 23, 2015 at 12:55 pm -

    Britney,

    You may qualify for a variety of different options, such as delayed financing via Fannie Mae, a HELOC or home equity loan if you just need a smaller amount to cover repairs. A 203k is a little more strict in terms of the use of the money and I’ve heard of people having problems paying contractors with the money stuck in escrow. Might be best to consult with someone who can shop a variety of programs to see what offers lowest rate and best terms for your situation, and I suppose best chances of approval based on condition of the property.

  64. Joe June 2, 2015 at 10:55 am -

    Hi

    I have a 1st mort with Wells Fargo and a 2nd HELOC with BOA. Both loans total $170K. Value of my home is $225K, so I’m within the 80% max. My question is can I do a cash out refi paying off 1st mort, keeping the HELOC as is and using the cash from the refi to purchase a second property?

    Thanks.

  65. Colin Robertson June 3, 2015 at 4:25 pm -

    Joe,

    They will need to subordinate the HELOC behind the new first mortgage, which could involve a pricing adjustment.

  66. Matthew June 10, 2015 at 10:27 am -

    Hi,

    I currently have a FHA loan for about 200k. We have some credit card debts of about 15k and have looked into a cash-out. My question is we are paying PMI at about $200 a month. My current rate is 3.75 and I’m being quoted for about 4.5%. I really don’t want to change my rate that much but I also hate paying PMI. My house is worth about 335k. What’s your suggestions? Cash-out and pay the higher interest rate or a 2nd mortgage or just stick it out?

    Thanks

  67. Colin Robertson June 12, 2015 at 5:05 pm -

    Matthew,

    Depends on your goal for the home/loan and how badly you need money…do you want to pay off the loan eventually or do you think you’ll move after just a handful of years. How many more months of PMI are due? A lot of questions…probably best to sit down and weigh pros and cons and do all the math with different scenarios. Most people don’t refinance to a higher rate. A home equity loan could work for your cash needs if you don’t want to mess with the existing first mortgage.

  68. Di June 18, 2015 at 5:06 pm -

    I’m considering a cash out re-fi on an investment single family house. I would like to pay myself back for the pool I put in at the investment house and make improvements to my primary residence. Mortgage is currently $150,000 and house will conservatively appraise around $350,00 – $365,000. I can get 65% LTV which is plenty. I understand there is no tax hit on the re-fi cash out monies, but is there a new cost basis when I sell? I originally purchased for $199,000. Will the cash out re-fi reduce capital gains?

  69. Colin Robertson June 18, 2015 at 10:15 pm -

    Di,

    That’s a tax question you should probably discuss with your CPA.

  70. Stephanie June 23, 2015 at 5:28 pm -

    I live in Texas and we want to do a cash out refi to purchase another property. My parents live in a mobile home that they own, that is on my acre with my house. Two separate families, two households, does this still qualify for a single family residence for a Cash out refi? If not are there any other financing options to accomplish our goal? Desperate!!
    Need reply ASAP.

  71. Colin Robertson June 24, 2015 at 9:29 am -

    Stephanie,

    Sounds like it could be tricky. Generally you want your home to be the main piece of collateral, not the land, or a mobile home on that land.

  72. Terrie June 30, 2015 at 8:25 am -

    Hi Colin,

    We currently have $57k (4 yrs, 10 mos.) remaining on a 15 yr cash-out refi @ 9.6%. (Our credit really sucked at the time as my husband had lost his job.) House is appraised at $160K with a market value of $180K per our tax records. FICO score 730. We are considering refinancing again with cash-out to pay off the high interest credit cards and do some home upgrades. We would actually lower our payments if we did a 15 year refi or pay the same if we did a 10year refi. We plan to stay in our house and have about 10 years left to work. Thoughts? Thank you!

  73. Colin Robertson July 1, 2015 at 2:20 pm -

    Terrie,

    It’s personal preference really…what your financial goals are, etc. You reset the clock again on your mortgage to 10-15 years depending on what you go with, as opposed the ~5 years remaining now but as you said, payments are lower and you tackle your other higher-APR debt. And you could always prepay your new mortgage faster if you want to avoid any extra interest expense from a longer amortization period.

  74. Laurie July 1, 2015 at 7:41 pm -

    Considering refi current mortgage of $143k, home value $220k, with cash out of $25k. APR currently 4.25, refi will be 5.25 and $100 more in mortgage payment. Just cashed out 401K to pay off credit cards and want to replace the nest egg. Is this something we should consider, or just keep current mortgage and refi if we need a nest egg?

  75. Lee July 1, 2015 at 10:07 pm -

    [In Texas.] Last year I did a cash-out refinance of my mortgage [which also rolled in a home equity loan]. I was attempting to get a home equity loan now, but I’m being denied because my first mortgage is now considered an equity loan and am being told that Texas doesn’t allow two equity loans at the same time. I’m being told the only way that I can tap into the existing equity, is to re-finance the first loan. Not an option since current interest rates are worse, plus I don’t want to reset the current remaining 14 years of that first loan’s term. Do I have any recourse to tap into my “available” equity, or am I simply S.O.L. until I fully pay-off (or refinance) that first loan.

  76. Colin Robertson July 2, 2015 at 11:06 am -

    Lee,

    I believe in Texas a home equity loan can only be refinanced with another home equity loan, so that would mean you currently have a home equity loan, limit of 1 as you noted. Might want to speak with more Texas-based lenders to see if there are any workarounds. There are also home improvement loans if the money is being used toward renovations.

  77. Colin Robertson July 2, 2015 at 11:12 am -

    Laurie,

    The short answer: If the nest egg money gets a better return than the higher mortgage rate and you don’t mind restarting the clock on your mortgage. Or paying an extra $100 a month. Also consider closing costs of new mortgage and max 401k contribution limits.

  78. RMirandaHill August 16, 2015 at 10:00 pm -

    Trying to decide which mortgage transaction to obtain first. We are currently waiting for a clear to close on a cash out refinance to pay off student loans and auto loans leaving a 80 % LTV. In the interim, we are waiting for a clear to close on a mortgage of a principle residence in which we want to have a 20% downpayment to avoid PMI. Are there any time constants in doing both mortgage transactions?

  79. Ty August 21, 2015 at 2:23 am -

    If a property was bought subject to, can the owner of the mortgage do a cash out refi or can the deed holder borrow against the property even though there is a primary mortgage on the property?

  80. jon September 4, 2015 at 8:55 am -

    I have no mortgage and want to do cash out refiance, does it make sense?

  81. Colin Robertson September 8, 2015 at 9:18 am -

    Jon,

    It can if you need the money for something and the interest rate is better than what you’d get elsewhere. But like anything there are pros and cons. Do the math, compare to other options, etc.

  82. Andria November 24, 2015 at 12:49 pm -

    Colin,

    We bought our home 2 and 1/2 years ago. We live in southern Oregon. We would like to do a cash out refi in order to pay off credit cards and a car payment. We paid out of pocket to have our home appraised. It appraised for $190k. We owe $160k. But according to all of the brokers I have talked to, that $30k in equity is inaccessible even though we make good money and our combined credit scores are >740. We do not need all of that $30k. We only want to utilize $20k. Is there ANYONE out there who is willing to do something like this?

  83. Colin Robertson December 1, 2015 at 12:03 pm -

    Andria,

    The LTV may be too high to tap into that equity, at least with the brokers you’ve spoken with. But you might be able to take out a home equity loan to get access to that money and leave your first mortgage as is.

  84. Dave January 17, 2016 at 1:03 am -

    Mr. Robertson, I have enjoyed reading the questions and your advise/responses on HELOC, Loans & Cash Outs.

    I have first VA 30-Year Fixed Mortgage started in 09/2012 so still fairly new, with 3.75% interest rate, for mortgage balance of $238,000 with $321,000 appraised value. Thinking of taking Home Equity Loan of $320,000 with Cash Out to reduce high credit card debt & to pay tuition for daughter who starts college in Fall 2016. New rate I qualified for and offered by lender is 3.50% for new/similar VA 30-year fixed rate. Although I think I understand pros/cons of cash out to consolidate/pay-off high interest credit card debt, majority of articles on topic advise against doing so…using refinancing/cash out to pay off high interest CC debt. It has me a bit cautious, although terms seem favorable and I’m financial secure (good job, pension, 401k), of course, other than carrying a lot of high interest credit care debt & high monthly interest payments that I would really like to resolve.

    I just received lender’s closing disclosure & total closing costs (initially project at $3400 but now $5000), other than appraisal & termite inspection, so I guess I’m just double & triple checking to make sure its the right decision.

    Thoughts / advice? Thank you.

  85. Colin Robertson January 19, 2016 at 5:52 pm -

    Dave,

    Those articles probably state that you can lose your house if you don’t keep up with payments, which is the general argument. But credit card APRs are excessively high and if you need money for college tuition then borrowing it at 3.5% seems pretty low relative to other options. It’s your choice and obviously you’ll need to be able to afford the larger loan amount that comes with the cash out.

  86. valerie malone January 25, 2016 at 6:09 pm -

    Does cash out or rate to term refinance remove PMI on a FHA loan as well as possibly get a lower interest rate…I ‘ve been in my house 2 + years. Interested refinance to get car and get lower current 4.25 interest rate …how much does interest rate need to be to make diffence in the mortgage payments ….pls advise

  87. Colin Robertson January 25, 2016 at 7:56 pm -

    Valerie,

    It can remove MI if you refinance to a conventional loan and the LTV is 80% or less. Rate difference depends on your personal situation and what you plan to do with the home/loan over time vs. other alternatives for your money.

  88. Dan February 20, 2016 at 2:21 am -

    I have an fha loan with a balance of $790,000 with a fixed rate of 3.25%. 3 year old loan that I am paying MI of almost $900 a month. My property value has gone up to $1,400,000. If I refi to a conventional loan and get $50,000 cashout, will I still have a new lower payment? I’m looking at a rate of 3.75%. Also was considering a biweekly payment schedule. Will this reduce my current payment? And still save me money by doing the biweekly payments? Even though the new loan is at a higher rate?

  89. Colin Robertson February 22, 2016 at 7:16 pm -

    Dan,

    Depends what the MIP costs…the upside is you will drop MIP if the new loan is under 80% LTV, which it sounds like it will be. Did you calculate the new loan amount at that rate to determine the monthly payment? The biweekly thing would actually mean that you pay more every year since you make 13 monthly payments (26 half payments).

  90. Kevin March 9, 2016 at 4:58 pm -

    Mr.Robertson, I have to come up with some cash of 12980.00 & 9800.00 to pay off cards. My house is close to being paid off the bal.is 5800.00. I’m thinking of a cash refinance from what I have built thur the years. And interest rate low and just have one payment. Do you think this is the best way to go? Or is there anything else you think I should think about? Thanks Kevin

  91. Colin Robertson March 16, 2016 at 10:30 am -

    Kevin,

    That might be one way to do it…there are also balance transfers with credit card companies that can offer low rates as well (sometimes 0%) without getting the home involved. Problem with mortgages is that the term is so long (e.g. 30 years) unless you go with a shorter term loan. Could also look into home equity loans and leave your first mortgage alone. Depends on the interest rates involved and your financial goals in terms of what’s favorable.

  92. Roger March 20, 2016 at 10:22 pm -

    Colin,
    What are your thoughts on cash out refinancing to get my tax bracket down. My income will go up significantly this year and next and I expect our tax bracket to go up. Am thinking of cash out refinancing our home of $750K value from its outstanding $330K mortgage. We have 12 years left on our mortgage. Is the amount of additional interest outweigh the taxes paid on income?

    Thanks
    Roger

  93. Colin Robertson March 22, 2016 at 11:41 am -

    Roger,

    Might be a question for your CPA or tax advisor. Generally cash out is taken for a specific purpose such as to buy another home, invest, pay for a large cost, etc.

  94. Natalie March 25, 2016 at 7:43 am -

    We are trying to refinance and our lender talked us into an FHA over a conventional loan. We are appraised at 255,000 and owe 204,000. They are stating we can only take out 10,000 cash. Do you know why? I thought we could take out up to 85%. Thanks

  95. Colin Robertson March 26, 2016 at 5:42 pm -

    Natalie,

    That’d be pretty close to 85% as it stands. Make sure you consider all options, including a second mortgage such as a HELOC or home equity loan to keep the first at/below 80% to avoid mortgage insurance. You can always just refi the first without cashing out (assuming you want a lower rate and/or to drop MI) and get a second for your cash needs.

  96. Berneice March 29, 2016 at 6:24 pm -

    Colin I owe 16,835 on my home with 5 years left. i need money for major repairs should i do a cash out or refinance with 2nd mortgage, i wanted to get about 20,000 of my home equity

  97. Colin Robertson April 4, 2016 at 6:55 pm -

    Berneice,

    If you’re loan is nearly paid off chances are the payments are mostly principal and very little interest, but it depends on the interest rate. A second loan (home equity loan/line) may make sense.

  98. Amy April 10, 2016 at 9:37 pm -

    Colin,

    I use to be a mortgage broker however, I am not very familiar with what has changed over the past several years. I and another party own my primary residence with no mortgage or liens. I want to buy him out and payoff all of our joint debt at 60% LTV. Would this be considered a refi or purchase since the deed would be changed? Also, what would you recommend for the fastest possible out come, “Quicken, Lending Tree,” or a local vender? The 60% includes closing costs, payment of consumer debt, A big fat check for the other owner and possibly a little cash in the bank… if there is anything left without increasing the LTV.

  99. Patty April 15, 2016 at 12:11 pm -

    I have a first mortgage of about 30K and a prime equity tied to prime interest rates of 600k property is worth around 1.5m.
    Will another bank refinance the 1st mortgage with a prime equity on the property all ready? I want to get a refinance of 250k?

  100. Colin Robertson April 18, 2016 at 10:18 am -

    Patty,

    They may permit a refinance but consolidate the existing loans into one or just two loans total.

  101. Colin Robertson April 18, 2016 at 10:41 am -

    Amy,

    Sounds like a refi…you may want to get with some brokers to discuss the best course of action…those big lenders probably aren’t the best for this situation since it’s not totally cut and dry, but who you use is up to you.

  102. Jan July 2, 2016 at 6:07 am -

    We bought a home with a FHA loan 9/2015. Now we realize my husband qualifies for a VA loan. We are wanting to refinance to get rid of the MI and get some of the cash back we put down. The current loan is 210000. The appraised value was $235000. We are retired on a fixed income with good credit and no debt but with a limited monthly income. What would you advise?

  103. Colin Robertson July 2, 2016 at 7:59 am -

    Jan,

    Probably best to compare all options that you can qualify for, including conventional to determine what the best deal is for your situation. But VA could make sense if you need cash out and want to avoid MI. There might be a funding fee to pay though.

  104. Eve July 8, 2016 at 1:42 pm -

    I bought a house 5 years ago and my mortgage balance is $79,000. The home is valued at $125,000. I am doing a VA refinance to get rid of $30,000 in credit card debt and student loans. I am supposed to receive the balance of $12,000 or so back from the bank.

    I was just told that I would not receive the money until 3-5 business days after closing. Is this routine or should I be worried?

  105. Taylor July 10, 2016 at 8:37 pm -

    I owe 70,000 on my home and have a HELOC that has a 23,000 balance. My home is valued at approx. 390,000.
    I want to purchase another home in another state as my primary residence. Can I and would it make sense to pull cash from the equity to purchase another home? Refinance?

  106. Colin Robertson July 12, 2016 at 10:59 am -

    Taylor,

    This is a common thing people do but paperwork probably states you intend to occupy current residence as primary for X amount of months.

  107. Joe July 23, 2016 at 9:59 am -

    Hi Colin,
    Great site with a lot of good information. I have a town home that I use to live in but is now a rental property that has a 87k balance left on it with 21 years/4.75 ARM. The house is valued at 127k. I want to refinance to a lower fix and pull 20k out to pay off student loans.
    Which option do you think is best for my situation?

  108. Colin Robertson July 23, 2016 at 10:31 am -

    Joe,

    Depends if you want to refinance the existing ARM or just add a home equity line/loan behind it…could potentially do a new single loan with added cash out though LTV limits may prevent you from getting the entire amount desired. Rate could also be steep but may want to explore both options to see what makes more sense for you personally.

  109. Jason July 30, 2016 at 5:06 am -

    Hi Colin,

    home value is 250 amount owed on home is 90,000/ 3.95 interest fixed rate 12 years left… I want to buy and investment property bank owned (55,000) and pay off my wife’s student loans( 25,000 at 6.8 %), cash offer from me. When i went in for the heloc they advised me to go see and refinance at a lower rate then they could provide. Now my closing is set about 45 days. and the bank raised the interest rate of the refi to 4.125 for 30 year…becuase they add points on cash out refi or i could pay off points( this confused me,can u clarify ……) now the bank has started my loan but i feel like i missing something?

  110. Colin Robertson August 2, 2016 at 8:52 am -

    Jason,

    Generally there are pricing adjustments for a cash out refi that raise the cost and/or interest rate of the loan. So they’re probably telling you that you can lower the rate by paying points (prepaid interest) at closing or just stick with the higher rate to keep upfront costs low/null.

  111. Dave Baker August 29, 2016 at 7:29 pm -

    Re the $100K max non-taxable – is that amount reduced if some of the cash is used for purchase of a second home, rather than your example of home improvements? And do the home improvements (or 2nd home purchase) have to be completed in the same calendar year ?

  112. Dave Baker August 30, 2016 at 3:43 am -

    I want to do a cash-out refi on my primary home for 80% of its $315K value, which could give me as much as ~$111K as the current remaining mortgage is $127K.

    I plan on using the majority of that money for downpayment on a 2nd home.

    My concern is the IRS max of $100K. If I invest in the 2nd property, rather than home improvements, does that avoid the $100K cap? And if I upgrade current home to avoid the $100K cap, does it have to be done in the current year?

  113. Colin Robertson August 30, 2016 at 8:40 am -

    Dave,

    Best to speak with your CPA or tax advisor to determine that.

  114. Mark Groves September 8, 2016 at 3:16 pm -

    Have an $800,000 primary residence mortgage free. What are the pros/cons to getting 200,000 cash out loan on this primary residence to pay off rental property.

  115. Colin Robertson September 8, 2016 at 5:17 pm -

    Mark,

    Just a tradeoff in terms of interest rate on the cash-out loan versus what you’re paying on the rental currently. And I suppose some people don’t like their primary encumbered, but sounds like a super low LTV and plenty of equity.

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