How does a Cash-Out Refinance Work?

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A cash-out refinance gives eligible homeowners access to their home's
equity that has accumulated in cash. You are borrowing against your
home's equity when you refinance your existing mortgage and replace
your old mortgage with a new one that has a higher loan amount than
what you currently owe.  Typically, mortgage lenders will let you
borrow up to 80% of your home value as part of a cash-out loan.

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How do I Calculate my Home Equity?

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Your home equity is the difference between the appraised value of your
home and how much you still owe on your mortgage.  For example, if
your home is worth $500,000 and you owe $220,000, you have $280,000 of equity in your home.  You can borrow against that equity with a cash-out refinance or a home equity loan (HELOC).

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How Much Equity Can I Cash Out?

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Typically, mortgage lenders will let you borrow up to 80% of your home
value as part of a cash-out loan.  For example, if your home appraises
for $500,000, a lender will let you borrow up to $400,000.

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Benefits Of Taking Equity Out Of Your Home

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Cashing out home equity comes with many benefits for homeowners, as
long as they understand the financial obligations that come with it.

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1. Use The Cash To Cover Major Expenses

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The money you receive when you take cash-out can be used without
restriction. You get the cash directly into your bank account.  As a
result, many homeowners find it beneficial to use the funds to cover
major expenses such as weddings, medical procedures, or college
tuition for their kids.

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2. Consolidate Debt

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High interest rates on credit cards make it harder for homeowners to
keep up with expenses and pay off debts for years to come.  Many
homeowners choose to use their funds from a cash-out refinance to
consolidate their existing debt and pay outstanding bills. Interest
rates are usually much higher on credit cards — with the average
credit card interest rate just above 16 percent — so using the funds
to pay off credit cards means you will pay a lot less over time.

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3. Reinvest The Funds Into Your Home

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Home equity funds can be used to pay for home improvements, which
increases the value of your property.  Homeowners planning to reinvest
funds into their homes should consider projects that offer a good
return on the money invested, such as redoing a bathroom, which is a
home project with one of best average returns on investment.

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4. Buy an Investment Property

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Many homeowners use the equity in their homes to buy an investment
property.  Using your home equity to purchase another property can
eliminate or reduce a homeowner’s out-of-pocket expenses and help you be able to afford a more expensive investment.

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5. You May Have Access To Improved Loan Terms

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With a cash-out refinance, you're taking out a new loan with different
— and usually better — terms. Depending on the market, it could mean
a shorter mortgage term and possibly lower rates.  That can be an added bonus in addition to the lumpsum of cash you'll receive from cashing out. Many times, a cash-out refinance allows you to pay a smaller monthly mortgage rate or even pay less over your loan's lifetime.

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Cash-Out Refinance Vs. HELOC: What's Better?

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A cash-out refinance and a home equity line of credit (HELOC) are
often confused, as they both borrow against home equity. However, each option functions differently.

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A HELOC is considered a second mortgage with its own terms and
repayment schedule.  Think of a HELOC as line of credit.  A HELOC does
not replace your current mortgage.  It's a second loan (a "second
mortgage") on your home.  When you use your HELOC you'll only pay
interest on the funds you use from the line of credit.  While a HELOC
is good for those who want flexibility, a cash-out refinance is
usually a better option for those looking to get cash at a lower cost.

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A cash-out refinance replaces your original mortgage with a new loan
and puts cash in your pocket. When you cash out your home equity, you take on a new loan, which will typically extend the length of time
you'll be paying off your home while reducing your overall equity in
the property.