Written by Denny Ceizyk | Edited by Crissinda Ponder | Updated March 23, 2023
A cash-out refinance is one way to access the equity you’ve built in your home at cheaper rates than you’ll find on credit cards or unsecured personal loans. Our mortgage cash-out refinance calculator helps you estimate the monthly payments on your new mortgage.
You’ll typically spend between 2% and 6% of your loan amount on refinance closing costs with a cash-out refinance. The fees on a cash-out refinance are similar to what you’ll find on a purchase loan and include:
Closing costs can be paid out of pocket or subtracted from your cash-out funds. You may also be offered a no-closing-cost refinance option. However, this choice isn’t free — your lender will simply raise your interest rate or increase your loan amount and pay the costs on your behalf, which means a higher monthly payment and more interest charges over the loan’s lifetime.
A cash-out refinance can lower your monthly mortgage payment if current rates have dropped to a point where the lower rate offsets borrowing more than you currently owe. For example, maybe you borrowed $350,000 at a 30-year fixed rate of 7% several years ago, and your current loan balance is only $300,000 with a monthly payment of $2,911.87.
If current 30-year fixed rates have dropped to 6% and you want to borrow an extra $25,000 to make some home improvements, your new monthly payment would only be $2,490.22. Despite tapping an extra $25,000 of equity, the lower rate and loan amount compared to your existing mortgage saves you $421.65 per month.
The equity requirement depends on what type of cash-out refinance you’re borrowing. Conventional and FHA lenders allow you to borrow up to a maximum 80% loan-to-value (LTV) ratio. VA lenders allow up to a 90% LTV for cash-out refinances. Your LTV ratio is the percentage of your home’s value that is financed by the loan.
For example, if your house is worth $450,000 and you owe $300,000 on your existing mortgage, you have $150,000 in available equity. Keeping the maximum 80% LTV ratio requirement in mind, you may borrow up to an additional $60,000 with a cash-out refinance. To calculate this, multiply your home’s value by 80% ($450,000 x 0.80 = $360,000) and subtract your outstanding loan balance from that amount ($360,000 – $100,000 = $60,000).
A cash-out refinance involves refinancing your existing mortgage into a new loan that is larger than your current outstanding loan balance. This allows you to take the difference between your old loan and new loan in cash. You can use that cash for any purpose, such as debt consolidation, home renovations or an investment property purchase.
For an in-depth explanation of cash-out refis, read our explainer on how a cash-out refinance works.
A cash-out refinance may a smart financial choice if:
You want to make home improvements. The lump-sum funds from your refinance could pay for kitchen upgrades or a new backyard deck.
You want to pay off high-interest-rate credit card debt. If you have maxed-out credit cards or high-interest-rate personal loans, you can consolidate them into one cash-out refinance loan. One drawback: The interest on the loan funds used to pay off your debt won’t be tax-deductible.
You need to cover college tuition expenses. Home equity cash may help pay for tuition, books or other higher education expenses.
You’re starting a small business or buying an investment property. Your home equity could provide seed money for a startup or help you start building a rental property portfolio.
These four steps will give you a rough idea of how much home equity you can convert to cash.
Although the basic guidelines for a cash-out refinance are the same as a rate-and-term refinance, there are some important differences.
To qualify for a cash-out refinance, you must meet the following general requirements:
⚠ A DTI ratio above 40% may cost you more in 2023. New changes to how Fannie Mae prices mortgage rates may result in a higher rate or more closing costs if your DTI ratio exceeds 40%. The new changes take effect May 1, 2023.
You’ll need to shop around to find the best cash-out refinance lender for you. Be sure to not only check with your existing lender, but gather refinance quotes from at least two other lenders. Ask for referrals from family and friends and check lender reviews.
Pay attention to the rate you’re quoted, plus your estimated closing costs. Additionally, think about how long you plan to stay in your home. If you’re moving soon after your refinance, it might not make sense to go through the process of replacing your existing mortgage. Make sure you enter your best offers into our cash-out refinance calculator above to compare offers and pick your best deal.
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