Cash Out Refinance

Cash Out Refinance
Betsalel CohenApr 12, 2021

If you need money to improve your financial situation, including home improvements, consolidate debt, pay for college expenses, and have equity in your home, consider a cash-out mortgage. 

A cash-out mortgage has low (historically low) interest rates and low monthly payments. According to mortgage experts Black Knight's December 2021 Mortgage Monitor Report, many homeowners have the potential to take out money from their homes. They estimate that the average homeowner holds $185,000 in tappable equity.

"Tappable equity – the amount available for mortgage holders to access while retaining at least 20% equity in their homes – increased by 35% in 2021, for an aggregate total of nearly $10 trillion."

What is a cash-out refinance?

A cash-out mortgage combines a traditional (rate/term) refinance with an additional sum above your current mortgage balance. Instead of taking out a second mortgage (either a Home Equity Loan or a Home Equity Line of Credit), you take out one mortgage that pays off your existing loan and leaves you with money in the bank. 

The most significant factor that affects your home equity is the housing market. Rising home prices lead directly to an increase in home equity. One way of tapping into the wealth and fixing one mortgage payment for all of your home loans is to take out a cash-out mortgage. 

Calculate your equity and loan-to-value (LTV)

A conventional loan program allows for a cash-out refinance of up to 80% of the value of your home. For example, if a borrower has a home that is worth $250,000 and their mortgage balance is currently $120,000, then their current LTV is 48%. Theoretically, if they qualify based on credit, income, and other lender requirements, the borrower can add another $80,000 on top of their existing mortgage and reach the 80% LTV. 

How much equity do you have?

Calculate Home Equity Value

Calculate your loan-to-value ratio (LTV).

Home Equity: LTV

Cash-out Refinance Mortgage – Stretching out Payments

Compared to a short-term personal loan, a cash-out refinance mortgage stretches out payments. Although it is possible to take out a mortgage for a shorter period, this will significantly increase the size of the monthly payment. 

If a borrower wishes to pay off the loan faster, then accelerated payments or lump sum prepayments are an effective method to lower financial costs, pay off the mortgage sooner and build equity in the home more quickly.

Do you Need Excellent Credit for a cash-out refinance mortgage?

In addition to the LTV, mortgage lenders will look at your credit history, credit score, qualifying income, and debt to income ratio (DTI). The most popular cash-out mortgages are conforming loans backed by Fannie Mae and Freddie Mac, which require a minimum score of 620.

However, you may be surprised to know that you can qualify with less than good credit scores from lenders offering non-QM cash-out mortgages. Cash Out Mortgage Calculator

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Top reasons to take a cash-out refinance recommends that you consider taking out cash from your home in a manner that best improves your financial situation. The most important reasons to take out a cash-out refinance are debt consolidation, home improvements, home repairs, financing college expenses, and paying hefty bills.

A cash-out can significantly improve your lifestyle. Maybe you accumulated debt? Cash-out mortgage debt consolidation is a great way to get a reduced interest rate and affordable monthly payments. Did you push off essential repairs? A cash-out refinance can let you complete home repairs such as a new roof, new flooring, or badly needed appliances.

One thing to keep in mind: Don’t use the money frivolously. A cash-out mortgage is not a gift. Consider your overall financial situation. Do you want cash for an expensive vacation? In general, it is a bad idea to finance consumption items using a long-term loan. 

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Frequently Asked Questions

What are my cash out refinance alternatives?


Cash-Out, Home Equity Loan, or...?

A cash-out is not necessarily the best solution for your financial situation? If you currently have a mortgage at a rate and you can afford high monthly payments, then consider a home equity loan (HEL) or a home equity line of credit (HELOC). The new interest rate will only apply to the new smaller mortgage, and you save on lower closing costs.

If you cannot qualify for a cash-out mortgage, or the payments do not fit your budget, then check for other solutions. If, for example, you are looking to consolidate debt, then check out the Debt Payoff Calculator for a personalized debt solution.

What are cash-out refinance trends?


Learn about cash-out mortgage trends in 2018. A combination of rising home prices, increasing incomes, and attractive but higher mortgage rates make for both opportunity and a need to carefully analyze the situation. Maybe you can benefit from a cash-out refinance? Get more information about the latest trends.