Cash-out refinance
Updated
What is cash-out refinance?
A cash-out refinance replaces your mortgage with a larger one and pays you the difference in cash at closing. It increases both your balance and your loan-to-value ratio.
How it is calculated
New loan amount = current balance + cash taken + (closing costs, if financed)
Cash-out refinance questions
- How does a cash-out refinance work?
- You replace your existing mortgage with a larger one and take the difference in cash at closing. The old loan is paid off in full, so the new rate applies to the whole balance rather than just the cash you took, and the term starts again from whatever length you choose.
- What is a cash-out refinance?
- A single new first mortgage that is bigger than the one it replaces, with the extra paid to you. It is one loan, not two: unlike a HELOC or a home equity loan, nothing of your old mortgage survives it.
- How much cash can you take out?
- Lenders conventionally cap a cash-out refinance at 80% of the home's value, so the ceiling is 80% of the value less what you still owe. Above that the loan is usually declined or priced sharply higher.
- When does a cash-out refinance cost more than a HELOC?
- Whenever your current rate is well below today's rates. A cash-out refinance re-prices your entire balance at the new rate, while a second lien leaves the first mortgage alone and charges the higher rate only on the amount you draw.
What it means in practice
The new loan equals your current balance plus the cash you take, plus any financed closing costs. Everything is priced at the new rate.
Because the entire balance is re-priced, a cash-out refinance is usually the most expensive way to access equity when your existing mortgage rate is materially lower than today's rates. A second lien leaves the first mortgage alone.
Lenders commonly cap cash-out refinances around 80% loan-to-value, and often price them above a comparable rate-and-term refinance.