Current cash-out refinance rates

How to get the best cash-out refinance rate

A cash-out refinance is a type of mortgage refinance that turns a portion of your home’s equity into cash. You’ll swap your current mortgage for a bigger loan, pocketing the difference between the two in a lump sum. You can use these funds for any purpose, whether it’s for a home renovation, college tuition or other expenses.

Because you’re taking out a bigger loan with a cash-out refinance, it’s all the more important to find the best possible rate. Here’s how:

• Review your credit. You won’t get the best interest rate possible if your credit score needs work. Well ahead of applying for a cash-out refinance, check your credit reports and scores. Many lenders allow you to qualify with a score as low as 620, but the best rates go to borrowers with a score of 740 or higher. Here’s more on how to improve your credit for a mortgage, plus bad-credit refinance options.
• Take stock of what you already owe. If you have other debt like a car loan or student loans, these factor into your debt-to-income (DTI) ratio. The lower your DTI ratio — ideally 45 percent or less — the better your chance of getting a lower rate. Keep in mind: You’d be getting a bigger mortgage with a cash-out refinance, so it might be harder to maintain a lower DTI. To find out yours, use our DTI calculator.
• Compare at least three cash-out refinance lenders. Obtain at least three rate quotes to help uncover the best deal. You might start with our picks for best cash-out lenders.

Cash-out refinance requirements

As with any mortgage, you must meet certain financial criteria to qualify for a cash-out refinance. Here are a few of the general requirements:

• Credit score: Most cash-out refinances require a credit score of 620 or higher.
• Debt-to-income (DTI) ratio: Your DTI is a measure of your monthly debt payments against your income. Most lenders limit your DTI ratio to no more than 45 percent for a cash-out refinance.
• Equity: You’re required to keep a minimum of 20 percent equity in your home. (The big exception to this is if you’re doing a VA cash-out refinance.)
• Six months to a year of payments on your current mortgage. You typically have to wait at least six to 12 months to refinance your mortgage after the original loan closed, though there could be exceptions.

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

Many lenders allow you to tap up to 80 percent of your home’s current value in a cash-out refinance. Conventional and FHA cash-out refinances are limited to 80 percent of your home’s value, but with a VA cash-out refinance, you can get up to 100 percent. USDA loans don’t allow for cash-out refinancing.

Let’s say your home is valued at $400,000 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. You’ll receive the cash shortly after closing.

Should you do a cash-out refinance?

You can use money from a cash-out refinance however you want to, but some of the most common uses include:

• Doing home improvement and renovation projects
• Consolidating high-interest debt
• Paying for education
• Getting a down payment on an investment property

While there are valid reasons for a cash-out refinance, you should consider the pros and cons as well. They include:

Pros of cash-out refinance

• Access to cash: You can turn your equity into a liquid asset you can use to cover home repairs or pay for college tuition, or anything else you need it for.
• Increase your home value: If you use a cash-out refinance to renovate your home with a kitchen remodel or an addition, for instance, you could grow the value of your home.
• Lower interest rates: Mortgages come with lower interest rates when compared to credit cards, personal loans and other forms of debt. You can use a cash-out refinance to pay off this higher-interest debt, which could save you money on interest and better your credit score by lowering your credit utilization.

Cons of cash-out refinance

• Owing more money: A cash-out refinance replaces your old mortgage with a new, larger mortgage. This means you’ll owe more, and could have a higher monthly payment.
• Closing costs: You’ll have to pay for some closing costs like you did for your original mortgage. For a cash-out refinance, the lender charges an appraisal fee, and might charge an origination fee, often a percentage of the amount you’re borrowing. With a cash-out, you’re getting a larger loan, so the origination fee reflects that.
• Foreclosure risk: Unlike credit cards and personal loans, mortgages are secured debt, with your home as collateral. If you’re unable to make your mortgage payments, your home will eventually be subject to foreclosure.