Cash-Out Refinance

Cash-out refinance summary:

  • A cash-out refinance is a mortgage refinance that lets you borrow more than your remaining home loan balance.

  • Once your existing mortgage is paid off, you're given a lump sum of cash to spend however you like.

  • A cash-out refinance could be used to consolidate debt or cover a large expense. 

Cash-out refinance definition and meaning

With a cash-out refinance, you apply for a new mortgage in an amount that’s more than you owe on your existing mortgage. The first mortgage is paid off, and the rest is given to you in cash. You can use that money for any purpose, whether it's funding a home renovation or consolidating debt.

Key concept: A refinance that lets you replace your mortgage with a bigger one. You pay off what you still owe, and the extra money comes back to you as cash.

More on cash-out refinance

A cash-out refinance typically has lower interest rates compared to other types of debt. Even if your new mortgage rate and balance are a bit higher than before, the rate is usually far less than credit card or personal loan rates.

Cash-out refinance could be an effective debt consolidation strategy. You could use the extra cash to pay off high-interest debts, rolling them into one manageable payment.

You may be able to get a tax break with a cash-out refinance. If you use the money for home improvements, the mortgage interest could be tax-deductible, depending on IRS rules.

Cash-out refinance: a comprehensive breakdown 

With a regular mortgage refinance, you borrow the exact sum you owe on your home when you sign your new mortgage. With a cash-out refinance, you borrow a greater amount so you have cash to use for other purposes. A cash-out refinance is a way of accessing some of your home equity.

To qualify for a cash-out refinance, your home needs to be worth more than your existing mortgage balance. In other words, you need to have some home equity. With a cash-out refinance, you may be able to qualify for a lower interest rate than you would with another type of loan, making it a good option for debt consolidation. 

A cash-out refinance might increase your monthly mortgage payments because you’re borrowing a larger sum of money than you owed originally. If you get an interest rate on your cash-out refinance that’s lower than your existing mortgage, your monthly payments could stay the same or even decrease. 

Key features of a cash-out refinance

With a cash-out refinance, you'll have:

  • Lender requirements for your credit score, income, debt-to-income ratio, and amount of home equity

  • Interest rate that your lender sets

  • Repayment period or loan term (15 or 30 years is common)

  • Closing costs to finalize your loan

Real-life example of a cash-out refinance

Let's say your home is worth $300,000 and you owe $180,000 on your mortgage. That means you have $120,000 in home equity—the current value of your home minus the amount you owe. 

Let's also say you owe $30,000 on a few credit cards, and you want to make those balances easier and more affordable to pay off.

A cash-out refinance could allow you to replace your existing mortgage with a new one for $210,000. The first $180,000 would pay off your existing mortgage. The remaining $30,000 would be yours to use as you want. You pay off your credit cards in full. Then, you’d make a single monthly payment to your mortgage loan servicer.

Cash-Out Refinance FAQs

With a cash-out refinance loan, you borrow enough to pay off the remaining balance on your first mortgage, plus more. The amount you borrow on top of your old mortgage is cash that you can spend. 

For example, if you owe $100,000 on your current mortgage, you might borrow $120,000 with a cash-out refinance loan. $100,000 will go to paying off your old mortgage, and you’ll receive $20,000 in cash. 

Cash-out refinance loans and home equity loans can both make sense in certain situations. Cash-out refinancing can be better if you prefer not to have two separate payments, or if interest rates have gone down since you took out your first mortgage. A home equity loan can be better if you are happy with your current mortgage and don’t want to change it. A home equity loan may also be easier to qualify for.

A home equity line of credit (HELOC) is a revolving credit line that works sort of like a credit card. You can spend money as needed and make payments back to your credit line. Only, instead of borrowing from the credit card company, you're drawing against your home equity. A cash-out refinance, on the other hand, is a loan that gives you a lump sum of money at closing.

Either option can save you money, depending on the circumstances. 

Most mortgage loans, including cash-out refis and HELOCs, have closing costs between 1% and 5% of the loan amount. Mortgages with no closing costs have higher interest rates, so in the long run, they don’t cost less than mortgages with closing costs. 

Cash-out refinance mortgages typically have lower interest rates than HELOCs. However, if you already have a low-interest rate on your existing mortgage, a cash-out refinance can increase the cost of paying off the money you still owe.

A HELOC could save you money by allowing you to borrow and pay interest only on the amount you need. On a cash-out refinance, you’ll pay interest on the entire loan amount from day one, even if it’s more than you needed.

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