What is a Cash-Out Refinance?

A cash-out refinance is one way to tap into the equity you have built in your home. Cash-out refinancing lets you refinance your current mortgage, borrow more than you owe, and then keep the difference in cash. 

For example, if you owe $100,000 on your home and had a low amount of debt to start with, or the house’s value increased to $200,000 since you bought it, you could take a cash-out refinance leaving you with up to $100,000 in extra cash. You could put this extra cash toward debt or pay for other expenses. This is extremely useful if you are paying high interest on those other debts. 


Who Benefits from a Cash-Out Refinance?

To be honest, a cash-out refi isn’t for everyone. Before making any major decisions, consider the following questions:

  • How long have you lived in your home? In order to do a cash-out refinance, you will need to have a decent amount of equity in your home. You can acquire equity either slowly over time, quickly through renovations, or if there is an increase in local house prices or values. Our lenders will typically require you to have made at least two years’ worth of payments and have a minimum of 20% equity. 
  • What are your interest rates? When exactly did you buy your home? If you bought during the housing crisis, you could already have a low interest rate. If you can’t get a lower interest rate on your mortgage, you could save on interest by paying off other debts that have higher interest rates. Transferring debt from a high, unsecured, interest rate to a low, secured, interest rate could be a financially sound option. 
  • What are all of your options?  Have you really considered all of your financing options? If you plan to pay your home off in record time, a cash-out refi can slow down the process. A few questions to consider: do you have assets you no longer want that can be sold to pay off debt? Do you have family you can take a loan out from?


The Benefits Should Outweigh the Costs

Figuring out the best timing for a cash-out refinance can be tricky. In any situation, you want the benefits to outweigh the costs when everything is said and done. A cash-out refinance will always have associated costs, with a majority of them being fixed. Fixed costs will need to be paid no matter the size of the loan, so making sure those costs don’t outweigh the cash itself is crucial.

Cash-out refinances rarely make sense for small amounts of cash. It’s best to reevaluate the estimated equity in your home often to make sure that refinancing is still a viable option. 


Debt Consolidation Doesn’t Have to be a Nightmare

Here’s why now might be a good time for a cash-out refinance:

  • Recent tax reforms have limited homeowners’ options when it comes to using home equity. 
  • When home prices increase, it means you’ll have more home equity available to you.