What is a Cash-Out Refinance?

A cash-out refinance replaces your existing mortgage with a new, larger loan. You receive the difference between the new loan amount and your current mortgage balance as cash.

How It Works

Example:

  • Home value: $500,000
  • Current mortgage: $300,000
  • New loan (80% LTV): $400,000
  • Cash received: $100,000 (minus closing costs)

Pros of Cash-Out Refinancing

  • Lower rate than HELOC: Fixed rate vs. variable
  • Tax-deductible interest: If used for home improvements
  • Large lump sum: Good for major expenses
  • Consolidate debt: Replace high-interest debt with lower mortgage rate
  • Single payment: Easier than managing multiple loans

Cons to Consider

  • Higher loan balance: You're borrowing more
  • Closing costs: 2-5% of new loan amount
  • Extended repayment: Resets your loan term
  • Risk to your home: Your house secures the loan
  • PMI possibility: If you borrow more than 80% LTV

Best Uses for Cash-Out Funds

  • Home improvements that increase value
  • Paying off high-interest debt
  • Education expenses
  • Emergency fund establishment

Not Recommended For

  • Vacation or luxury purchases
  • Investing in volatile markets
  • Paying for recurring expenses
  • Paying off debt you'll rack up again

Requirements

  • Sufficient home equity (typically need at least 20% remaining)
  • Good credit score (620+ for conventional, lower for FHA)
  • Debt-to-income ratio under 43-50%
  • Stable income and employment