What is a cash-out refinance?

A cash-out refinance is when you take money out of your home's equity by using the new loan balance (after refinancing) to pay off some or all of your current mortgage.

There are many reasons people might want to do this, including: consolidating high-interest debt; paying for college tuition; helping children buy their first home; taking advantage of low interest rates and tax benefits; or simply having funds available in case an emergency comes up. There are also drawbacks to doing a cash-out refinance, like increasing your monthly payment and possibly reducing the amount you can borrow later on. The best way to find out if it’s right for you is to talk with your current lender about what they offer and then compare that to your other loan options.

How does a cash-out refinance work?

When you do a cash-out refinance, your current lender will tell you how much money you're able to take out of your home equity and what interest rate they'll charge.

Your lender will use the new loan balance (after refinancing) to pay off your current mortgage and give you the difference in the form of a lump sum payment.

How much money can you get?

When doing a cash-out refinance, you should look first at how much equity is in your home. Your lender will use this figure to help determine how much money you're able to borrow. Generally, you can go up to 80% of the appraised value of the home, so the higher the value of the home, and the less you owe, the more you can borrow.

For example, if your home is worth $200k, and you owe $100k, then you have $100k worth of equity. If you want to get a new loan for up to 80% of this amount, then your cash-out refinance loan can be up to $80k.

Advantages and disadvantages of doing a cash-out refinance

One of the advantages of taking out a cash-out refi is that you get to borrow a large sum of money for a relatively low interest rate over a long period of time; the monthly payments are typically lower than if you borrowed the same amount with other methods. On top of that, this money is not taxed. One strategy a lot of investors employ is to do a cash-out refinance once they build up enough equity in a property instead of selling, since you would only have to pay taxes on the latter.

The disadvantage is that you increase your loan balance significantly. You want to make sure it's worth it by meeting with a qualified lender and going over the numbers. There's also the issue of closing costs. You should make sure that the amount you are borrowing makes paying the closing costs worth it. If you borrow $10k, but pay $5k in closing costs, that's a much more expensive loan than borrowing $80k, but paying almost the same in closing costs.

Summary

When you do a cash-out refinance, you can use the equity of your home to get money that you can use for investments or other needs. You'll need to meet with a mortgage lender and go over the numbers, but it's a good way to get a lot of money with a low interest and low monthly payments.