Cash-Out Refinance 

There are different reasons to refinance your home. You may want to take advantage of the lower rates or change the terms of loan. You may need cash for home improvements, college tuition, medical expenses, or to pay off debts. If you’ve built at least 20% equity in your home, then a cash-out refinance is an option for you.
Financial growth concept, real estate tax

As your equity increases, you can refinance your mortgage and receive cash for that equity. With a cash-out refinance, you replace your old mortgage with a new one in a larger amount than your previous loan. Then you receive the difference, or an amount determined by lender.  A cash-out refinance is a new mortgage and not a second mortgage.  

Equity in your home can increase in a couple of ways:

  1. You’ve paid down the principle of the loan and owe less than 80% of the loan principle.
  2. Your home has increased in value which changes the loan-to-value rate. This can happen because you’ve done home improvements or because the market has changed.  

How does a cash-out refinance work?

Let’s say Joe and Sue took out a mortgage for $300,000 ten years ago. They now want to do $40,000 worth of home improvements. They also notice that the interest rates have gone down since they first took out their loan. Instead of taking out a line of credit, they decide to do a cash-out refinance. 

Since Joe and Sue purchased their home, they’ve paid $150,000 of their loan principle. They’ve built up 50% equity. The lender takes what they owe, $150,000, and adds the total cash they are taking out of their equity, $40,000. Their new refinanced mortgage principle will be $190,000.  After they close, that cash is theirs to spend how they wish.  

Important Questions about Cash-Out Refinance:

Do you meet the requirements?

Miniature buildings, real estate

Can you get what you need through the refinance?

Lenders won’t let you cash out more than 80% of your home’s value minus what you owe. They typically want you to leave 20% equity in your home. If you need more than that, then you may need other resources. In the example above, 80% of the value of Joe and Sue’s home is $240,000. Subtract the $150,000 they owed on the original loan and the total they could cash out is approximately $90,000. They have enough equity to do the improvements they planned. 

How is a cash-out refinance different than a home equity loan or home equity line of credit (HELOC)?

With a cash-out refinance, you replace your existing mortgage with new mortgage at higher amount. You still only have one mortgage. A home equity loan or HELOC is an additional mortgage.  

The best way to evaluate if a cash-out refinance is right for you is to look at your equity, the interest rates, closing costs, and any tax deductions that might come with the refinance.