What is a cash-out refinance?
Read, 3 minutes
Key takeaways
- A cash-out refinance lets you withdraw money from the equity in your home
- The money can be used for things like debt consolidation or home improvements
- The interest rate you pay may be fixed or adjustable
If you’re interested in borrowing against your home equity, you have options. One choice is a cash-out refinancing—that’s when you pay off the original loan(s) on your home, take on a new one and get cash for some of the equity you have in the home.
How does a cash-out refinance work?
Refinancing a mortgage means replacing your existing loan with a new one that includes a new interest rate and term.
A cash-out refinance is a type of mortgage refinance that allows you to withdraw a lump sum of cash from the equity built up in your home. The portion of equity you take out is then added onto your new mortgage principal.
The interest rate you pay is applied to your new mortgage and may be fixed or adjustable depending on the type of loan you choose.
You pay the loan back with monthly payments of principal plus interest for the duration of the new mortgage.
How much equity is needed for a cash-out refinance?
The amount you can withdraw depends on the amount of equity you have, and in most cases, you’ll need to maintain at least 20 percent of the new loan’s value in equity after the refinancing. The appraised value of your home is a key factor in determining how much cash you can receive.
Is cash-out refinancing worth it?
There are many perks to a cash-out refinance. However, it’s important to balance the expenses of replacing your mortgage and paying closing costs with the benefits of how you intend to use the cash. Before you leverage equity in your home, consider whether the plans you have in mind are worth the risk.
Key considerations for a cash-out refinance
If you have equity in your home, a cash-out refinance can make sense. However, there are also reasons to avoid it.
Flexibility
With a cash-out refinance, you can use the money for any purpose, like debt consolidation, home improvements or to pay for higher education.
Interest rates
Your new loan could have a lower interest rate, depending on when you took out your existing mortgage, current interest rates and your credit history. With a cash-out refinance, your rate will also generally be lower than credit card interest rates or the rates on a personal loan.
Closing costs
Just like with any mortgage or refinance, you’ll pay closing costs for a cash-out refinance, which could include fees for appraisals and credit reports.
Repayment period
With a cash-out refinance, you’re replacing your existing loan with a new one for a higher amount, which could lengthen the time you’re paying it back, and the amount of interest you pay over time.
Collateral
As with any home equity option, a cash-out refinance uses your home as collateral, so a failure to make your loan payments could put you at risk of foreclosure.
Comparing the loans
There are other ways to borrow against your home equity. Depending on your situation, a home equity loan or line of credit can be more helpful than a cash-out refinance. Here’s how the different options stack up.
Taking the next step
If you think a cash-out refinance is right for you, make sure you check all your boxes. Do your research, know your budget and talk with your lender to find the best option for you.
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