Cash-Out Refinance: Turn Home Equity Into Cash

What a cash-out refinance is

A cash-out refinance is a new first mortgage written for more than you owe today. The new loan pays off your existing mortgage and the costs of closing, and the remaining amount is paid to you. You walk away with a lump sum and a single mortgage payment.

The money comes from your equity, which is the difference between your home's market value and the balance on any loans secured by it. As you pay down your mortgage and as home values change, that equity can grow. A cash-out refinance converts part of it into spendable funds.

How much equity you may be able to access

Lenders do not let you borrow against the full value of your home. Each loan type and investor sets a cap on how much of the value can be financed, and that cap is usually lower for cash-out loans than for purchases or standard refinances. It is also lower for second homes and rental properties than for a primary residence.

Your available cash depends on four things: the appraised value, your current payoff, the investor's maximum, and your credit and income. Because the appraisal sets the value, the final figure is not known until the report comes back. A loan officer can give you an early estimate, but treat it as a starting point.

Common uses for the money

Paying off higher-cost debt. Many borrowers fold credit cards, personal loans or medical bills into the mortgage to simplify their finances. Lenders can pay those creditors directly at closing.

Home improvement. Roofs, kitchens, additions, energy upgrades and accessibility changes are frequent projects. Having the full amount upfront makes it easier to pay contractors on schedule.

Education and family needs. Some families use equity for college costs or to help with a major life event.

Equity buyouts. After a divorce or when siblings inherit a house together, one owner may use a cash-out refinance to pay the others for their share.

How you use the money can affect whether the interest is deductible. Talk to a tax professional before counting on a deduction.

The risks of a larger mortgage

A cash-out refinance raises the debt secured by your home. That is the central trade-off. Credit card debt that goes unpaid hurts your credit; mortgage debt that goes unpaid can lead to foreclosure. Make sure the new payment fits your budget even if your income dips.

You also give up your existing loan. If your current mortgage has favorable terms, replacing the entire balance to access a smaller amount of cash may cost more over time than adding a second lien. Closing costs apply to the full new loan amount, not just the cash portion.

Finally, stretching short-term debts over a long mortgage term can mean paying interest on them for many more years. Ask for the total of payments on the new loan, and compare it with paying the debts off on their current schedule.

Cash-out refinance vs HELOC vs home equity loan

All three let you borrow against your home, but they work differently.

A cash-out refinance replaces your first mortgage. You get one loan, one payment and a lump sum. It tends to fit borrowers whose current mortgage terms are no better than what a new loan may offer, or who want to consolidate everything into a single lien.

A home equity loan is a separate second mortgage paid out as a lump sum, usually with a fixed rate. Your first mortgage stays untouched.

A HELOC is a revolving line of credit secured by your home. You draw what you need during a draw period and the rate is usually variable. It also leaves your first mortgage in place.

If you like your current mortgage, a second lien often deserves a close look. If you want a clean slate with one payment, a cash-out refinance may suit you better. A loan officer can price the options side by side.

Getting started

Gather your mortgage statement, recent income documents, statements for any debts you want to pay off and a clear number for the cash you need. How much equity you may tap varies by borrower, property and investor, and any cash-out loan is subject to credit approval. Choose your state and city to learn more and connect with a licensed loan officer.

Try it: Cash-Out Refinance Calculator (estimate only).

Talk about cash-out refinance

A licensed loan officer can walk through your options. Programs vary by borrower, property and investor.

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Cash-Out Refinance