What Is a Cash-Out Refinance, and How Does It Work?
If you’ve built equity in your home, a cash-out refinance could help you put that value to work. This option allows you to refinance your current mortgage and borrow against your home’s equity at the same time. Whether you’re planning renovations, paying off debt, or preparing for a large expense, a cash-out refinance gives you a way to fund it using what you already own.
What makes a cash-out refinance different?
A standard refinance replaces your current mortgage with a new one, usually to secure a different rate or term. A cash-out refinance does that plus gives you a lump sum of cash at closing. It’s like combining a refinance with a home equity loan.
Your new loan balance will include:
- The amount you still owe on your existing mortgage
- The cash you choose to take out
- Any closing costs or fees, if rolled in
That means your total loan amount and monthly payment will go up, but you’ll walk away with funds you can use for whatever matters most right now.
How much can you borrow?
The amount you can take out depends on how much equity you’ve built. Equity is the difference between your home’s value and what you still owe on your mortgage. Most lenders will allow you to borrow up to 80% of your home’s current value.
Example:
If your home is worth $400,000 and you owe $300,000, you have $100,000 in equity. If you need to leave 20% equity in the home, that leaves about $20,000 available to borrow.
Keep in mind:
- You need to have equity built up, which usually takes a few years of mortgage payments
- You will still pay closing costs (typically 2 to 6% of your loan amount), though some borrowers choose to roll them into the new loan
Why would someone choose a cash-out refinance?
There are a lot of smart ways to use the value you’ve built in your home. Some of the most common include:
- Home improvements: From needed repairs to dream upgrades, this can boost comfort and property value
- Outdoor projects: Patios, pools, landscaping, and tree removal
- Energy efficiency upgrades: Solar panels, tankless water heaters, new windows, or insulation
- Smart tech additions: Connected thermostats, lighting, security systems, and other automation
- Debt consolidation: Replacing high-interest debt with one lower-interest mortgage payment
- Medical expenses or emergencies: Covering major out-of-pocket costs when needed
- Big life events: Weddings, education, or other long-term investments in your future
Pros and cons of a cash-out refinance
Potential Benefits
- Interest rates on mortgage loans are often lower than personal loans or credit cards
- Can simplify finances by consolidating debt
- May provide tax advantages (talk to a tax advisor for specifics)
- Helps free up cash flow for large purchases or pressing needs
Things to Consider
- You are increasing your total loan amount
- You will pay closing costs on the full loan, not just the cash-out portion
- You are resetting your mortgage term, which could extend how long you’re in repayment
- Your original payment history closes with your old loan, which could temporarily affect your credit
Should you consider a cash-out refinance?
Rates fluctuate, but equity is a long-term asset. If you bought your home a few years ago and have built up value, a cash-out refinance might be worth exploring. It all comes down to your goals, your current mortgage terms, and how you plan to use the funds.
A loan officer can walk you through personalized options, help you compare loan types, and run the numbers to see what’s right for you.
