Cash-Out Refinance: Explained

Imagine your dream kitchen, spa-like bathroom oasis, or perfect backyard. Or envision paying off debt, sending your kids to college free of student loan debt, finally taking that vacation, or having money to invest and build wealth. Now, picture having available funds to transform your vision into reality – without having to dip into your hard-earned savings. And no, you don’t have to win the lottery to access cash to lead the life you’ve always wanted… A cash-out refinance may be the solution you’ve been waiting for!

How a Cash-Out Refinance Works
A cash-out refinance is a loan type where you essentially “cash in” your home equity for cash in your pocket. Generally, this loan type replaces an existing mortgage with a loan amount that’s more than the current mortgage loan. You receive the difference between the two loans (i.e., home equity) in cash at closing. Keep in mind that you most likely won’t be able to take out 100% of your home’s equity – the max LTV (loan-to-value ratio) is usually 80%.

Types of Cash-Out Refinances
Just like a mortgage for a home purchase, there are many different loan types to choose for a cash-out refinance, including FHA, VA, conventional, and jumbo loans. With both conventional and FHA loans, you are required to leave at least 20% equity in your home after a refinance. With a VA loan refinance, you can cash out all the home equity.
Additionally, and again, like a mortgage intended for a home purchase, there’s a process from the time of application to closing, including underwriting, processing, and approvals. Keep in mind that closings costs, other fees, and appraisals are all a part of cash-out refinance loans as well.

Pros and Cons of a Cash-Out Refinance
As with any decision, especially a major financial decision like a cash-out refinance, weighing the pros and cons helps you understand if it’s a good fit for you.

Pros to Consider

• Interest rates are typically lower than HELOCs and personal loans
• There’s a variety of loan types to choose from
• The mortgage interest may be tax-deductible
• The cash from your home equity can be used for nearly anything you want

Cons to Consider

• A cash-out refinance will likely extend the repayment time of your mortgage
• Closing costs and origination fees are expenses to consider
• If your interest rate on your current mortgage is lower than what you could qualify for with a cash-out refinance, you could have a higher interest rate loan, paying more every month

Cash-Out vs HELOC: What’s the difference?

A cash-out refinance is often compared to a home equity line of credit (HELOC), although the two are not the same. In most cases, a HELOC is an additional (second) mortgage, with its own repayment schedule, terms, and conditions.

As you know by now, a cash-out refinance results in a lump sum of cash at closing. In comparison, a HELOC has a draw period (generally 10 years) where you can withdraw an approved amount of money as needed – from the line of credit. The draw period ends, and the repayment period begins (typically 20 years). Additionally, HELOCs generally have a variable interest rate, meaning it can change based on the market.

Whether a cash-out refinance or HELOC makes sense for you depends on your financial needs and goals.

Is a Cash-Out Refinance Better than a HELOC?

Both options can be used to fund home improvements or get rid of high-interest debt. A HELOC might make more sense if you want to delay payment and draw from the loan amount as needed over the course of ten years whereas with a cash-out refinance you would get immediate access to cash at a lower cost to borrow. Both options are great for your individual cash-flow needs, but its up to you to decide which is more in line with your goals.

Try Our Cash-Out Refinance Calculator

Wondering what a cash-out refinance could look like for you? Plug in numbers on our cash-out refinance calculator specific to your finances (current home value, the amount of cash you prefer to receive, etc.) and compare your current monthly payment to your new monthly payment after taking cash out.

Connect with a loan officer to learn about the most fitting mortgage path for you!