A cash-out refinance lets you access some of the equity you have built in your home. Your existing mortgage is replaced with a new, larger mortgage, and you receive a portion of the difference in cash after applicable costs and adjustments.
Homeowners may use the cash for many different reasons, including paying off higher-interest debt, renovating a home, purchasing another property, or covering a major expense.
Your current mortgage rate is an important part of the decision, but it is not the only number to consider. You should also look at your other debts, monthly payments, closing costs, new loan terms, and overall financial goals.
What Is a Cash-Out Refinance?
A cash-out refinance mortgage replaces your existing mortgage with a new loan for more than you currently owe. The difference between your current mortgage balance and the new loan amount, after applicable costs and adjustments, is provided to you as cash.
The amount you may be able to take out depends on your home’s value, current mortgage balance, loan program, property type, qualifications, and applicable loan-to-value limits.
A cash-out refinance is different from a standard refinance. A standard refinance swaps your existing mortgage for a new one to alter the loan terms. You do not obtain a large amount of cash from the home’s equity in this process.
How Does a Cash-Out Refinance Work?
Assume your home is valued at $1,000,000 and you have a mortgage balance of $400,000.
You might be able to swap that mortgage for a larger loan and obtain part of your equity as cash. This outcome depends on the loan program, the type of property, your qualifications, and loan-to-value limits.
The new loan settles your existing mortgage. After closing costs and adjustments are taken out, you receive the cash-out proceeds.
The cash is added to your new mortgage balance. You should review the complete terms of the new loan, such as the interest rate, monthly payment, total loan amount, closing costs, and the term length.
Why Consider a Cash-Out Refinance?
Homeowners opt for cash-out for a range of reasons. The choice depends on your particular needs and how the new mortgage fits with your other financial obligations.
Below are several common reasons homeowners select a cash-out refinance.
Consolidate Higher-Interest Debt
You might want to compare the costs of a cash-out refinance if you carry credit-card balances, personal loans, or other high-interest debt.
For example, a homeowner could have a low rate on the existing mortgage but also owe $75,000 in credit-card and personal-loan debt at much higher rates.
Refinancing would replace the current mortgage rate. Yet, using the cash to eliminate higher-rate debt might lower total monthly payments or boost available cash flow.
Before deciding, compare the new mortgage rate, loan amount, monthly payment, closing costs, and loan term with the interest rates of the debts you plan to pay off.
Simplify Your Monthly Payments
A cash-out refinance can be employed to settle several different balances at closing.
You can combine those balances into a single mortgage payment rather than making separate payments for a mortgage, credit cards, and personal loans.
Some homeowners favor having fewer monthly payments to manage, which should be considered along with the actual cost of the new loan.
Pay for Home Improvements or Renovations
Projects such as kitchen remodels, bathroom renovations, additions, or major repairs often need substantial cash.
You could use the equity in your home rather than tapping savings or high-interest consumer debt.
Some improvements may raise the property’s value. Do not assume the added value will equal or exceed the project’s cost.
Purchase Another Property
You can apply cash-out proceeds to purchase a second home or an investment property.
The funds can pay for a down payment and closing costs. This lets you access capital without selling other investments or assets.
Cover a Major Expense
Homeowners use cash-out proceeds for tuition, large purchases, unexpected costs, or other financial needs.
The amount you withdraw is added to your new mortgage. You should weigh the financing cost of that expense over the loan’s life instead of focusing only on the immediate cash amount.
What Are the Requirements for a Cash-Out Refinance?
Requirements for a cash-out refinance vary depending on the borrower and the loan program.
Lenders typically examine the following factors:
Home Equity and Loan-to-Value (LTV)
The value of your property and your current mortgage balance determine how much equity is available.
Credit Profile
Your credit score and history can affect your eligibility, the interest rate, and the programs you can access.
Lenders compare your monthly debt payments with your qualifying income.
Income and Assets
The required financial documents depend on the particular mortgage program and your financial situation.
Property Type and Occupancy
Rules may vary depending on whether the property is a primary residence, a second home, or an investment property.
A mortgage professional can examine your details and explain the cash-out refinance options that are available to you.
Cash-Out Refinance vs. HELOC
A cash-out refinance is not the only way to access the equity in your home.
The main difference is how the financing is structured. A cash-out refinance replaces your existing mortgage with a new mortgage and provides additional proceeds at closing.
A home equity line of credit, or HELOC, is generally a separate loan secured by your home. It stays alongside your first mortgage and allows you to draw funds as needed, subject to the terms of the HELOC.
If you have a particularly attractive rate on your existing first mortgage, you may want to consider a HELOC because you can access home equity without refinancing that entire mortgage.
If you are carrying substantial higher-interest debt, compare the cost and monthly payments of a HELOC with the cost of a cash-out refinance.
There is no single option that works for every homeowner. The amount of cash you need, your current mortgage, available rates, how you plan to use the money, and your broader financial goals can all affect the decision.
When Does a Cash-Out Refinance Make Sense?
Many homeowners assume refinancing only makes sense when they can get a lower mortgage rate. That is not always the case.
Let’s say you have a low-rate first mortgage but also have significant credit-card balances at much higher interest rates. Keeping your current mortgage may seem like the obvious choice when you look at that rate by itself.
But the credit-card debt is also part of your monthly financial picture. If those balances are creating significant interest expense and large monthly payments, using home equity to consolidate the debt may be worth evaluating.
Look at what you are paying across all of your debt, not just the rate on your first mortgage. Your current mortgage payment, other debt payments, interest rates, closing costs, new loan terms, available equity, and long-term goals all play a role.
Also consider how long you may be paying on the new mortgage. Refinancing can increase the total finance charges paid over the life of the loan.
Is a Cash-Out Refinance Right for You?
The answer depends on your current mortgage, the equity in your home, your other debts, and what you want to accomplish with the funds.
GuardHill Financial’s mortgage professionals can review your existing mortgage and financial situation and help you compare the options that may be available.
If you are considering a cash-out refinance to consolidate higher-interest debt, renovate your home, purchase another property, or cover another financial need, contact GuardHill Financial to discuss your cash-out refinance options.
*All loans are subject to credit and property approval. Refinancing may increase the total finance charges paid over the life of the loan. Consolidating unsecured debt into a mortgage converts that debt into debt secured by your home. Consult with appropriate financial and tax professionals regarding your individual circumstances.*
Frequently Asked Questions About Cash-Out Refinancing
How much cash can you get from a cash-out refinance?
The amount is determined by your home’s value, your current mortgage balance, the loan program, the property type, your qualifications, and loan-to-value limits. Typically, you cannot borrow the full amount of equity in your home.
How long does a cash-out refinance take?
The timeline varies according to the lender, loan program, appraisal requirements, documentation, and underwriting. A mortgage professional can provide a specific timeline for your transaction.
