Cash-Out Refinancing: A Complete Breakdown
When you need money fast, cash-out refinancing can let you tap into your home equity for a more affordable solution than personal loans or credit cards. We go over the details below.
What Is Cash-Out Refinancing?
Exchanges your current loan with a larger one
Cash-out refinancing exchanges your current mortgage with a new one for more than your current balance. This means there will be money left over after paying off the original loan.
Gives you the difference in cash
The difference between the new loan and the remaining balance is paid to you as cash. Generally, there are no restrictions on how you can use this money.
Helps you meet financial goals
Whether you want to consolidate debt, remodel, pay for medical expenses, or cover something unexpected, cash-out refinancing can help.
What Else Can Cash-Out Refinancing Be Used For
Education expenses
Cash-out refinancing can be used as an affordable alternative to student loans to help fund tuition, school fees, and other educational costs for borrowers or their family members.
Buying investment property
Borrowers can also use the cash from refinancing to make a down payment on a property that generates revenue. This can help create another income stream and build long-term wealth with real estate.
Vacations or travel
If you have a dream vacation or a bucket list item you want to check off, you can use cash-out refinancing to create unforgettable memories without having to rely on credit cards.
Pros
- Gives borrowers quick access to money
- Can offer more advantageous loan terms
- No restrictions on how funds are used
- May eliminate private mortgage insurance (PMI)
Cons
- Borrowers may incur new closing costs
- A larger loan balance may increase monthly payments
- The repayment period can also increase
- Taking cash out reduces home equity until it's rebuilt
Talk to our mortgage experts today about finding the right loan for you.
Alternatives to Cash-Out Refinancing
- A Home Equity Line of Credit (HELOC) works the same way as a credit card
- Borrowers get access to a revolving line of credit that replenishes as it gets paid
- Homeowners can borrow and pay interest on only the amount they need
- Ideal for covering renovations, medical bills, and other ongoing purchases
- A home equity loan is paid out in a lump sum
- Offers fixed interest rates for predictable payments
- Doesn't replace an existing mortgage
- Best for large expenses like debt consolidation
- Homeowners aged 62+ can access equity without monthly repayments
- Funds can be used as long as the home is a primary residence
- Repayment is deferred until the home is sold or the owner moves out
- Great for seniors who want to supplement retirement income without selling their home
Is Cash-Out Refinancing Is Right for Me?
You have sufficient home equity
If you have owned your home for a specific period of time and have sufficient equity, you may qualify for cash-out refinancing. Timeframe and equity amounts vary depending on the program you choose.
Your debt-to-income ratio is manageable
Before refinancing your home with a larger mortgage, you’ll need to make sure you have a handle on your existing debts.
You meet specific program requirements
If you’re applying for a specific cash-out refinancing program, there may be additional qualification criteria you must meet. For example, VA cash-out refinancing is only available to Veterans and spouses with sufficient eligibility.
Best When Should I Use Cash-Out Refinancing?
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FAQ
How much does cash-out refinancing cost?
How much money can I get?
How are cash-out refinancing and home equity loans different?
Cash-out refinancing replaces your current mortgage with a new one, while a home equity loan is a separate, additional loan that doesn’t alter your existing mortgage. With cash-out refinancing, you only need to make payments on one mortgage, but with a home equity loan, you will be paying on a 1st and 2nd mortgage.
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