With a cash-out refinance, you get a new home loan for more than you currently owe on your house. The difference between that new mortgage amount and the balance on your previous mortgage goes to you at closing in cash, which you can spend on home improvements, debt consolidation or other financial needs.
However, you'll now be repaying a larger loan with different terms, including a new mortgage rate, so it's important to weigh the pros and cons before committing to a cash-out refi.
With a standard rate-and-term refinance, you get a new interest rate or mortgage term without changing the balance of the loan. You might do this because rates have gone down, for example, and you want a lower monthly payment or because you need to add or remove a borrower.
In contrast, a cash-out refinance gives you a new loan that's larger than your current mortgage balance — and you pocket the difference.
How much cash you’re eligible to access depends upon your home equity — how much your home is worth compared to how much you owe.
Steps to getting a cash-out refinance
Determine your home equity. Home equity is the market value of your home minus what you still owe. For example, if your home is worth $300,000 and you have $100,000 remaining on your loan, you have $200,000 in home equity.
Calculate the maximum loan you can take out. In general, that’s 80% of your home’s value. Using the previous example, you would multiply $300,000 times 0.80 for a maximum of $240,000. Remember that this isn’t the same as 80% of the purchase price; your home’s value may be different now than it was when you bought it.
Subtract your current mortgage balance. From that new $240,000 loan, you’ll have to pay off what you still owe on your home: $240,000 - $100,000 = $140,000.
Estimate your total. In a cash-out refinance, you receive the difference between the balance on your previous mortgage and your new, larger mortgage. In this example, it's as much as $140,000.
Shop rates from multiple lenders. This will help you to get the best deal.
Weigh alternatives. Once you’ve researched available rates, calculate your new monthly mortgage payment and determine if it makes sense and is affordable for you. If not, you may be better off pursuing another type of loan.
Submit an application. As with your original mortgage, you’ll have to go through the appraisal and underwriting process before closing on the loan and accessing your cash.
