Is a cash out-refinance worth it?

Sage Home Loans
NMLS #3304

What's a cash-out refinance?

As you pay off your mortgage, you gain equity in your home. Basically, equity is how much of your home's value that you've paid off. Sometimes though, you'll have a need for cash. In that case, you can take some of the equity you've built up in your home in exchange for a mortgage that's higher than what you owe. By getting a larger mortgage, you're able to take the difference in cash. This is called a cash-out refinance. 

The cash can be used for any purpose, so it could be a good option if you're looking to fund a large expense like home improvements, paying for college, or paying down debt. 

Cash-out refinances sometimes will have slightly higher interest rates than regular refinances, and they come with closing costs and fees (which may be rolled into the loan so you don't have to pay them out-of-pocket). Even with these considerations, a cash-out refinance can be a great option, and we're here to help you see if it might be right for you.

How much cash can you get?

The amount you can take out depends on your home's value and how much you've already paid off. You can't withdraw more than 80 percent of your home's value in cash, and you need to keep at least 20 percent equity in your home.

For example, let's say your home is worth $300,000 and you have $100,000 left to pay off. If you want to make some upgrades for $10,000, you'd be able to take out a new mortgage for $110,000 (the amount you have left + the amount you want to borrow) ideally at a lower interest rate than what you're currently paying. 

Your loan officer can help you do the math and see how much cash you could get with a cash-out refinance on your home.

Deciding if it's right for you

Today's low interest rates make refinancing tempting, and the idea of getting extra cash from it is appealing too, but it may not be right for everyone. 

Take a look at your current loan. Are you looking to get a lower interest rate? Pay off your mortgage faster? Change your terms? Depending on your goals and finances, it may be better to go for a standard refinance instead of a cash-out. 

Cash-out refinance pros and cons

Pros:

  • You can get a large sum of money relatively quickly to help you achieve one or more of your financial goals

  • You could get a lower interest rate or better terms than your current mortgage

  • If you use the funds to pay for home improvements, you could raise the value of your home

Cons:

  • Your interest rate will probably be higher than a rate-and-term refinance

  • You might end up taking longer to pay off your mortgage than you would without refinancing

Alternatives to consider:

If you're looking for cash and aren't sure if you should use a refinance to get it, you could also consider getting a home equity loan or home equity line of credit (HELOC). These don't replace your original mortgage, but typically will come with higher interest rates than you'd get with a cash-out refinance. 

Our loan officers can help you explore and see which is best for you. Start your application today and see how Sage Home Loans can help!

About the Author

We're here to help you confidently make smarter decisions about financing your home.