Cash-Out Refinance: How It Works and When to Get One

Cash-Out Refinance: How It Works and When to Get One

With a cash-out refinance, you might be able to get a lower interest rate and larger loan amount than with a personal loan or other alternative.

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. payday loans in Tennessee NMLS # 1681276, is referred to here as «Credible.»

If you need money for home improvements, paying down debt, or financing other major expenses, you could consider tapping into your home’s equity with a cash-out refinance.

With a cash-out refinance, your existing mortgage is paid off and replaced by a new loan with a higher loan amount than what you owe on your home. You get the extra amount, minus any closing costs, as a lump sum payment to use as you wish.

What is a cash-out refinance?

Cash-out refinancing lets you use the equity in your home (the difference between how much your home is worth and how much you owe on your existing mortgage) to take out a larger mortgage.

The new mortgage pays off your old mortgage, then you get the difference between the two, minus closing costs, as cash. Like traditional mortgage refinancing, your new loan will most likely have different terms than your old one.

How does a cash-out refinance work?

Now, say you wanted to take out $10,000 in equity to replace your roof. With a cash-out refinance, that amount would be applied to your new mortgage’s principal balance. So, in the end, you’d take out a mortgage worth $160,000 – $150,000 to pay off your original mortgage and $10,000 in cash to cover the cost of the roof.

If you decide that cash-out refinancing is right for you, be sure to consider as many lenders as possible to find the best deal. Credible makes this easy – you can compare multiple lenders and see prequalified rates in as little as three minutes.

  • Compare lenders
  • Get cash out to pay off high-interest debt
  • Prequalify in just 3 minutes

Cash-out refinance rates

Today’s cash-out refinance rates are still near historic lows. However, these rates can be as much as 0.5% higher than a traditional mortgage refinance since you’re tapping your home equity.

  • Credit score: A higher credit score can help you qualify for a lower mortgage rate.
  • Loan-to-value ratio (LTV): A lower LTV ratio can reduce your rate if you don’t access all of your available home equity since you’re borrowing less.
  • Repayment term: Longer repayment lengths have a higher interest rate but a lower monthly payment.
  • Closing costs: Your lender may allow you to roll your closing costs into the loan. Unfortunately, this choice increases your ortization.
  • Debt-to-income ratio (DTI): A higher DTI poses more risk and a lender may not approve your application. Strive to have a DTI ratio of 36% or less before you apply with a conventional mortgage lender.

With a cash-out refinance, you’ll pay the same interest rate on your existing mortgage principal and the lump-sum equity payment. Most lenders offer fixed interest rates so you can easily calculate your monthly payment.

Pros of cash-out refinancing

  • Low interest rate: Cash-out refinances have lower interest rates than credit cards or personal loans, which can make them a cost-effective option for financing projects like home renovations.
  • Larger loan amount: Depending on how much equity you have in your home, you might be able to get a larger amount of cash than you could with alternatives like a personal loan.
Cash-Out Refinance: How It Works and When to Get One

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