Cash-out Refinance

Looking to make some needed home improvements, add a pool in the backyard, pay for tuition, or take that out-of-country dream trip?

Depending on your current situation, accessing money from your home's equity in a cash-out refinance could be a valuable tool to help you achieve your short or long-term financial goals. With low rates and historically high home values, many Americans are tapping into their home's equity with a cash-out refinance.

How does a cash-out refinance work?

When you refinance your mortgage, you replace your original mortgage with a new one. Refinancing allows borrowers to obtain a new mortgage with a new interest rate and term. You're not eliminating your debt; you're moving it to a new loan.

In a cash-out refinance, you can access the equity in your home in a lump sum payout in exchange for a larger mortgage. The amount of cash you can pull out depends on the current value of your home and how much you owe on your mortgage.

That's why, to qualify for a cash-out refinance, you need to have a certain amount of equity in your home to pull from. Typically, lenders want you to keep at least 20% equity in your home.

What is equity?

Equity is a homeowner's financial interest in a property. It is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens. Homeowners gain equity by making payments toward their principal each month and/or when the value of their home rises.

Homeowners who put more significant amounts down on their homes or have been in their homes for a more extended period tend to have more equity built up. However, with the recent growth in home prices, many Americans are experiencing a rapid increase in their home's value compared to a few years ago, leaving them with additional equity in their home.

When applying for a cash-out refinance, your lender will likely send an appraiser to your house to assess your home's market value, regardless of how much you purchased your home for.

How much cash could you potentially receive in a cash-out refinance?

Your loan officer will be able to run the numbers and figure out if a cash-out refinance makes sense for your situation. The amount of cash you can access will depend on several factors, such as the current value of your home, the amount you owe on your mortgage, your current debts and incomes, your credit score, and other factors.

How can you use your money?

Once a homeowner closes on their cash-out refinance, a lump sum is typically wired their your bank account at closing and can be used for virtually anything.

Here's what it is commonly used for:

  • Home improvement projects or renovations, such as additions, kitchen or bath renovations or adding outdoor living space. Putting the money back into your home can also help boost your home's value, increasing your equity.
  • Education expenses, such as college tuition.
  • Unexpected expenses, such as medical bills, legal fees or car repair costs.
  • Money for a down payments a vacation home or investment property.
  • Consolidating debt to pay off high-interest credit card debt or other bills.
  • Weddings, vacations or other dream opportunities.