Current cash-out refinance rates

Written by Jeff Ostrowski

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How does cash-out refinancing work?

If you’ve accumulated enough equity in your home and need cash for your child’s college tuition, home repairs or any other purpose, a cash-out refinance can get you the funds while (potentially) lowering your mortgage rate.

In a cash-out refinance, you replace your current mortgage with a larger one, withdrawing the difference — a portion of your home’s equity — in cash as a lump sum. While you can lower the rate on the new loan, you may still pay more in interest overall because your total loan balance will be bigger, and your monthly payment will likely change as well.

Many mortgage lenders offer cash-out refinancing — here are some of the best. While you might be offered a good deal or perks with your current lender, shop around and compare refinance rates and fees between a few lenders.

How much money can you get in a cash-out refinance?

You can get up to 80 percent of your home’s current value in a cash-out refinance. You typically receive the cash shortly after closing.

Let’s say your home is valued at $300,000 and you have $100,000 left to pay on your mortgage. If you wanted to get $30,000 for a renovation, you’d cash out $30,000 and add that to your $100,000 balance, for a new loan totaling $130,000.

Note that FHA cash-out refinances are also limited to 80 percent of your home’s value, but with a VA cash-out refinance, you can get up to 100 percent.

How much equity do you need to do a cash-out refinance?

You generally need at least 20 percent equity in your home to do a cash-out refinance because lenders usually don’t allow for more than 80 percent of the total equity to be in debt for non-VA borrowers.

What are the fees for a cash-out refinance?

Like other types of loans, cash-out refinances come with closing costs that can range from 3 percent to 5 percent of the new loan amount. Closing costs cover expenses such as appraisal, credit check and lender origination fees.

Is a cash-out refinance a good idea?

If the following circumstances apply to you, a cash-out refinance could help you achieve your goals:

  • You want to lower your interest rate. If you want to take advantage of a lower rate while getting cash, a cash-out refinance might be right for you.
  • You want to renovate your home. If you’d like to make renovations to your home, a cash-out refinance can get you the funds to make it happen. If you’re undertaking an eligible project that increases the value of your home, you can deduct the mortgage interest, too.
  • You want to pay for your child’s tuition costs. This strategy can make sense if student loan interest rates are higher than the rate on your new mortgage.
  • You have high-interest debt. Maybe you’ve accumulated a significant amount of credit card or other high-interest debt and need to consolidate. You can use a cash-out refinance to accomplish this.

A cash-out refinance might not be a good idea if:

  • Your interest rate will rise. Ideally, refinancing should lower your interest rate, not increase it. If the cash-out refinance offer you’re considering comes with a higher rate than the one you have now, rethink it.
  • You can’t afford the closing costs. Since closing costs can be 3 percent to 5 percent of your new loan amount, it’s important to make sure that expense won’t outweigh your potential savings, and that you have enough cash on hand if you’re not planning to roll them into the new loan balance.
  • You could have trouble repaying it. Whichever way you choose to use the cash, you need to make sure you’ll be able to repay the loan, or risk foreclosure. It’s best to withdraw only the cash you need, and put it toward projects that will give you some financial benefit, like a home renovation, which boosts your equity, or debt consolidation of higher-interest loans.

Cash-out refinance vs. home equity loan

A cash-out refinance replaces your current mortgage with a larger loan, with you taking the difference between the new and old loan in cash. Like other types of refinances, you can redefine the terms of your mortgage, such as the interest rate and term.

A home equity loan is a second mortgage, and doesn’t change the terms of your primary home loan. Home equity loans generally have a higher interest rate than primary mortgages even with a cash-out refi, but the closing costs can be lower since the balance on a home equity loan iis usually lower than that of a primary mortgage. Both typically require you to maintain at least 20 percent equity.

If your goal is to take out a significant amount of cash and get a lower rate, a cash-out refinance could be the better option. If you can afford both your first and second mortgage payments and don’t want to change the terms of your first mortgage — maybe you’ve already paid down most of it — a home equity loan might be the right option for you.