A cash-out refinance is one way to borrow cash at cheaper rates than you’ll find on credit cards or unsecured personal loans. It allows you to replace your current mortgage with a new one that covers both the cash you borrow against your home equity and the home itself.
Our cash-out refinance calculator helps you estimate the monthly payments on your new mortgage; here’s how:
Loan Product | Interest Rate | APR |
|---|---|---|
| 30-year fixed rate refinance | 7.38% | 7.60% |
| 15-year fixed rate refinance | 6.75% | 7.19% |
| 10-year fixed rate refinance | 7.12% | 7.76% |
| FHA 30-year fixed rate refinance | 6.71% | 7.45% |
| 30-year 5/1 ARM refinance | 6.63% | 7.04% |
| VA 30-year fixed rate refinance | 6.47% | 6.85% |
| VA 15-year fixed rate refinance | 6.05% | 6.71% |
The fees on a cash-out refinance are similar to what you’ll find on a purchase loan and include:
Closing costs can be paid out of pocket or subtracted from your cash-out funds. Your lender may also offer a no-closing-cost refinance option. However, this choice isn’t free — your lender will either raise your interest rate or increase your loan amount to pay the costs on your behalf, which means a higher monthly payment and more interest charges over the loan’s lifetime.
If current rates have dropped enough that your new, lower rate offsets borrowing more than you currently owe, a cash-out refinance can lower your monthly mortgage payment.
For example:
Let’s say you purchased a home with a $350,000 mortgage at a 7% fixed interest rate and a $2,329 monthly payment. That was several years ago, and now your current loan balance is only $200,000.
→ Home purchase price: $350,000
→ Current interest rate: 7%
→ Monthly payment: $2,329
→ Remaining loan balance: $200,000
If mortgage interest rates have dropped to 6% and you want to borrow an extra $25,000 ($225,000 total) to make some home improvements, your new monthly payment would only be $1,349.
→ New interest rate: 6%
→ Cash-out amount: $25,000
→ New refinance loan amount: $225,000
→ New monthly payment: $1,349
You would save $980 per month with the lower rate and loan amount compared to your existing mortgage, despite tapping an extra $25,000 of equity.
| Loan type | Required equity amount | Maximum LTV ratio |
|---|---|---|
| Conventional cash-out refinance | 20% | 80% |
| FHA cash-out refinance | 20% | 80% |
| VA cash-out refinance | 10% | 90% |
How much equity you’re required to have depends on what type of cash-out refinance you use. Lenders express this requirement as a loan-to-value (LTV) ratio, which is the percentage of your home’s value that is financed by the loan.
Both conventional loans and FHA loans allow you to borrow up to a maximum 80% LTV ratio. VA loans allow up to a 90% LTV for cash-out refinances.
These three steps will give you a rough idea of how much home equity you can convert to cash:
For example:
Let’s say your house is worth $450,000 and you owe $300,000 on your existing mortgage, which means you have $150,000 in available equity.
At the maximum 80% LTV ratio requirement, you can calculate this by:
→ Multiplying your home’s value by 80% ($450,000 x 0.80 = $360,000)
→ Subtracting your outstanding loan balance from that amount ($360,000 – $100,000 = $60,000)
You may borrow up to an additional $60,000 with a cash-out refinance.
A cash-out refinance involves refinancing your existing mortgage into a new loan that is larger than your current outstanding loan balance. This allows you to take the difference between your old loan and new loan in cash. You can use that cash for any purpose, such as debt consolidation, home renovations or an investment property purchase.
A cash-out refinance may be a risky or unwise choice if:
The interest rate on your refinance loan is higher than your current mortgage rate. If your interest rate goes up, you’re volunteering to pay more than you have to in borrowing costs for every dollar of your original mortgage’s remaining balance.
You’re using the cash payout to consolidate short-term debt. If you’re using the cash from a refinance to pay off short-term debts — like credit card debt — keep in mind that you’re going to pay interest on that money for a far longer time period. Don’t assume that a low interest rate is better than a higher one, because added time means added interest costs. Crunch the numbers to ensure you’ll benefit financially from consolidating.
You want to use the money to buy luxuries or big-ticket items that depreciate quickly. It’s natural for cars, furniture or other fun potential purchases to catch your eye. But if you can’t afford to buy them with cash, you should consider whether you can afford them at all. It’s not wise to borrow money for items that will only detract from your financial health.
You don’t feel 100% confident that you can make the payments. If you have any doubt that you can keep up with your payments, you shouldn’t take out any loan that uses your home as collateral. It’s not worth it to lose your house, damage your credit or go through the stresses of foreclosure.
Although the basic guidelines for a cash-out refinance are the same as a rate-and-term refinance, there are some important differences.
To qualify for a cash-out refinance, you must meet the following general requirements:
You’ll need to shop around to find the best refinance lender for you. Be sure to not only check with your existing lender, but gather refinance quotes from at least two other lenders. To get a feel for what’s out there, you can explore online lender reviews or ask for referrals from family and friends.
Pay attention to both the interest rates and annual percentage rates (APRs) of any loans you’re offered. Additionally, think about how long you plan to stay in your home. If you’re moving soon after your refinance, it might not make sense to go through the process of replacing your existing mortgage.
Enter your best offers into our cash-out refinance calculator at the top of this page to compare offers and pick your best deal.
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