A borrower currently owes $180,000 on their home valued at $250,000. They want to obtain a new loan for $200,000 to pay off the existing mortgage and receive $20,000 in cash. What type of transaction is this?
Correct Answer
C) Cash-out refinance
This is a cash-out refinance because the new loan amount ($200,000) exceeds the existing mortgage balance ($180,000) by more than the allowable tolerance for closing costs, and the borrower receives cash at closing. Cash-out refinances involve obtaining a new mortgage for more than the current loan balance to access equity.
Why This Is the Correct Answer
This is a cash-out refinance because the new loan amount ($200,000) exceeds the existing mortgage balance ($180,000) by more than the allowable tolerance for closing costs, and the borrower receives cash at closing. Cash-out refinances involve obtaining a new mortgage for more than the current loan balance to access equity.
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