When you own a home, you build equity over time by making payments toward the principal and letting the market value naturally appreciate. The downside? Your equity is typically locked up until you sell the property.<\/p>\n
However, you can tap into your home equity without having to move. A cash-out refinance replaces your old mortgage with a new, larger loan. You pocket the difference and pay down the new loan over time.<\/p>\n
While there are many benefits to getting a cash-out refinance, it isn\u2019t always the best way to access your home equity.<\/p>\n
Here\u2019s what you need to know about cash-out refinances, including some of the major pros and cons:<\/strong><\/p>\n <\/a><\/p>\n A cash-out refinance<\/a> is a type of mortgage refinance that allows you to take out a loan for more than you owe on your current mortgage. The lender hands you the difference in cash, minus closing costs. You pay back the new loan over time, usually between 15 and 30 years. Your home acts as collateral on the loan, just like with a regular mortgage. <\/p>\n <\/a><\/p>\n A cash-out refinance replaces your existing mortgage with a new, larger mortgage. You get the difference as a lump sum of cash, usually through a wire transfer to your bank account after closing. You can use the cash for any purpose, but popular uses include debt consolidation and home improvements.<\/p>\n There\u2019s usually a \u201cseasoning\u201d requirement, which is a period you\u2019ll need to wait between closing on your first mortgage and getting a cash-out refinance. The seasoning requirement depends on the type of mortgage you have.<\/p>\n The amount you can borrow depends on your home\u2019s value, mortgage balance, and credit score<\/a>. You\u2019ll typically need a loan-to-value (LTV) ratio<\/a> of at least 80% after the cash-out refinance. <\/p>\n Lenders generally only allow you to borrow against 80% of your home\u2019s value, so, in this case, you\u2019ll be able to get a new loan for $240,000 and cash out $90,000.<\/p>\n That maximum loan amount will also need to cover closing costs, like administrative expenses and appraisal fees. <\/p>\n If you\u2019re considering a cash-out refinance, be sure to look at as many lenders as possible. Credible makes finding the best deal easy \u2014 you can compare multiple lenders and see prequalified refinance rates<\/a> in as little as three minutes.<\/p>\n\n
What is a cash-out refinance?<\/h2>\n
How does a cash-out refinance work?<\/h2>\n
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\n\t Pros of cash-out refinancing<\/b><\/th> Cons of cash-out refinancing<\/b><\/th>\n<\/tr>\n<\/thead>\n\n \n\t Lower interest rates:<\/b> If interest rates have decreased since you took out your first mortgage, cash-out refinancing may help you secure a lower rate.<\/td> Higher interest costs:<\/b> These loans often have slightly higher interest rates compared to standard rate and term refinances. Additionally, borrowing more money and extending your loan term can increase the amount of interest you pay over the life of your loan.<\/td>\n<\/tr>\n \n\t Large loans:<\/b> You may be able to borrow more than you could with a personal loan or credit card. Since the cash-out loan is secured by a valuable asset \u2014 your home \u2014 mortgage lenders are typically generous with borrowing limits.<\/td> Closing costs: <\/b>These typically range from 2% to 5% of the loan amount. You may be able to avoid closing costs or even get a credit at closing, but you\u2019ll probably pay a higher interest rate in exchange for the upfront savings.<\/td>\n<\/tr>\n \n\t Potential tax benefits:<\/b> Interest payments on home loans are tax-deductible when you use the money to buy, build, or substantially improve your home.<\/td> Foreclosure risk:<\/b> If your new loan increases your monthly payment, you might have a harder time keeping up if your income dips or your expenses rise. You could be at higher risk of foreclosure than if you hadn\u2019t refinanced.<\/td>\n<\/tr>\n \n\t Manage just one loan:<\/b> You\u2019ll deal with just one payment each month, whereas other forms of borrowing require you to make separate payments on your debt.<\/td> Lost equity:<\/b> Cash-out refinancing reduces your home equity. That could put you at greater risk of ending up underwater on your loan and being unable to pay it off should home values drop and you need to sell.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n