Net proceeds from a refinance represent the cash amount you receive after replacing your existing mortgage with a new one, paying off the old loan balance and all associated fees. This process is most common in a cash-out refinance, where the new loan exceeds the old mortgage balance, allowing you to access part of your home equity as liquid cash.
Calculating Net Proceeds from Refinance
To determine your net proceeds, subtract the payoff amount of your old mortgage and closing costs from your new loan amount.
Formula:
New Loan Amount – Payoff of Old Loan – Closing Costs = Net Proceeds
- New Loan Amount: The principal of your approved refinance loan.
- Payoff for Old Loan: Includes remaining principal, accrued interest up to closing, and any prepayment penalties.
- Closing Costs: Fees to complete the loan, typically 2%-5% of the loan amount, including appraisal fees, title insurance, and origination fees. Learn more about refinance closing costs.
Example:
If your home is worth $500,000 and you owe $250,000, refinancing with a new loan for $350,000 and paying $9,000 in closing costs would leave you with $91,000 in net proceeds. This is cash you can use, but you’ve increased your mortgage balance and monthly payments.
Important to Understand:
Net proceeds come from your home equity—the difference between your home’s value and what you owe. This is borrowed money, not free cash. When you take a cash-out refinance, you reduce your home equity and increase your loan balance.
Common Uses for Net Proceeds:
- Home improvements to increase property value. See home renovation financing options.
- Paying off high-interest debt by consolidating into a lower-rate mortgage.
- Funding education, starting a business, or covering major expenses.
Avoid These Mistakes:
- Underestimating closing costs. Always review your Loan Estimate carefully.
- Treating proceeds as extra income instead of borrowed money.
- Using long-term mortgage debt for short-term expenses.
FAQs:
- Are net proceeds taxable? No, loan proceeds are not income according to IRS Publication 936. IRS Publication 936
- How soon is cash disbursed? After a three-day ‘right of rescission’ cooling-off period, typically funds are available on the fourth business day post-closing. More on right of rescission.
- Difference between cash-out refinance and net proceeds? The cash-out refinance is the loan transaction itself; net proceeds are the actual cash you receive.
Understanding net proceeds is key to making informed decisions about refinancing and leveraging home equity without surprises. For more about refinancing, check our Mortgage Refinance Checklist and related guides.