Cash-Out Mortgage Refinance Overview
- Use our CASH-OUT REFINANCE CALCULATOR to assess the financial impact of a cash-out refinance
- In a Cash-Out Refinancing What Can I Use the Proceeds for?
- Cash-Out Refinance Example
You may be able to refinance your mortgage and use the equity in your home to pay for a major expense such as college tuition or home renovations. In a cash-out refinancing your new mortgage amount is greater than the principal balance of your existing mortgage. The borrower keeps the difference between the amount of the new mortgage and the principal balance of the existing mortgage, less closing costs, and can use the money for a variety of purposes such as a major purchase.
To obtain a cash-out refinance you must have enough equity in your property to support a new higher mortgage amount. For a cash-out refinance, most lenders permit a maximum loan-to-value (LTV) ratio of 80%. LTV ratio is the ratio of your loan amount to the fair market value of your home. Your home must be worth enough to support your new mortgage amount while not exceeding the lender's LTV limit. If you are taking a significant amount of cash out (greater than $250,000), lenders may apply a lower LTV ratio limit of 60% - 70%, depending on the amount. We recommend that you determine the estimated fair market value for your property before discussing a cash-out refinance with lenders so you understand what mortgage amount is achievable.
If you are using the proceeds from a cash-out refinance for a major purchase such as college tuition, home remodeling or a new car it is important to compare the interest rate and term for your new mortgage with the interest rate and term for a loan if you financed the purchase separately. For example, if a construction loan charges a 10.0% interest rate then using a cash-out refinance mortgage with a 4.5% interest rate to pay for home renovations could make more sense. On the other hand, if a loan to pay for college tuition charges 3.0% then a cash-out refinance does not make financial sense because you would be paying a higher interest rate on the new mortgage. It is also important to factor the length of any loan into your decision-making process. The longer the loan, the more total interest expense you pay.
Please note that the interest rate on a cash-out refinance is usually .250% to .750% higher than the interest rate on a standard refinance, with the rate being higher for jumbo loans. Because of the higher interest rate for a cash-out refinance and potential variation in rates between lenders, borrowers should compare multiple lenders to find the loan with the best terms
You can use the proceeds from a cash-out refinancing for numerous purposes including home remodeling, college tuition or to pay-off high cost debt. Lenders typically request that you disclose what you will use the proceeds from the refinancing for. If you disclose that you are going to use the proceeds to purchase a second home, investment property or to make a significant investment, the lender will typically request that you provide details about the property or investment. Most borrowers disclose that they will use proceeds from a cash-out refinancing for general home repairs and remodeling or simply put the money in the bank in which cases lenders typically do not request detailed follow-up information.
In the example below we show a borrower that owns a property with a value of $400,000 who needs $50,000 to pay for college tuition. The borrower originally took out a $300,000, 30 year fixed rate mortgage with a 5.0% interest rate to purchase the property. The borrower is 10 years into the original mortgage and has a current mortgage balance of $244,000. The borrower has $156,000 in equity in the property: $400,000 (property value) - $244,000 (mortgage balance) = $156,000 in equity.
The borrower refinances the original mortgage with a 30 year fixed rate mortgage with an interest rate of 5.0%, so there is no change in interest rate. The amount of the refinanced mortgage is $300,000, the same as the amount of the original mortgage. By refinancing, the borrower is able to take out $54,500 in cash – the difference between the amount of the new mortgage and the principal balance of the original mortgage, less closing costs – to pay for college tuition. The borrower could also choose to include the closing costs in the mortgage amount as long as the LTV does not exceed the lender's limit. Because the interest rate and mortgage amount do not change, the borrower's monthly mortgage payment does not change. The example demonstrates how a cash-out refinance enables borrowers to use the equity in their property to cost-effectively finance a major expense.
|Amount of Original Mortgage||$300,000|
|Years into Mortgage||10|
|Current Principal Balance||$244,000|
|Equity in Property||$156,000|
|Pay-off Current Mortgage Balance||($244,000)|
|Cash-out Available to Borrower from Refinance||$54,500|
|Amount of New Mortgage||$300,000|
|Equity in Property||$100,000|