What is a cash-out refinance?

A cash-out refi is a refinance option that allows homeowners to borrow money using the equity they have in their home. Rather than a second mortgage, a cash-out refi replaces your previous mortgage loan with an entirely new one. Typically, this new loan has a shorter term, lower interest rate, or both, with the main benefit being that this type of loan lets homeowners borrow lump sums using their home equity.

Cash-out refi terms and conditions

As a cash-out refi is essentially a combination of your original mortgage costs plus the amount you’re borrowing from your equity, your payments will be higher than they were before you refinanced -- because you are now borrowing a larger sum. Additionally, you may pay more interest than you previously did, depending on how the market looks.

Your refinance will come with its own repayment term, which can include either a fixed interest rate or an adjustable interest rate. With a fixed interest rate, you’ll be expected to repay your debt over a set number of years (usually 15, 20 or 30 years), at a set rate. Adjustable rates, however, are subject to change over time. This typically means a low rate to start with and higher rates thereafter.

There is always a risk with borrowing, and as with any other home equity loan, the risk that comes with a cash-out refinance is your house. If you are not able to keep up with payments, you risk losing your home to foreclosure. It’s important that homeowners who opt to refinance continue to borrow thoughtfully -- just because you have access to extra cash doesn’t mean you have to use it. Only borrow what you need.

Is a cash-out refi your best option?

One factor to consider when it comes to a cash-out refi is your break-even point. As refinancing comes with significant closing fees, and cash-out refinancing typically involves higher monthly payments than a basic mortgage, it can take a while for your refi to become worth it. A couple of major questions to keep in mind are why exactly you’re getting the loan, what value add a loan would bring to your life and/or house, and how taking out a loan will affect your house payments.

Before taking out a home equity loan, consider: is this a financially sound decision that you can pay off later? Are you getting a loan to make home improvements that will greatly increase your standard of living and/or home value? Or are you taking out a loan to make some large purchases today, knowing you likely won’t be able to afford higher monthly payments later? What’s worth it is up to you, but always keep it in mind.

Still, there are many positives when it comes to a cash-out refi, particularly if you are a homeowner looking to pay off other debt or work on a new major project that requires cash. Here are a few of the major pros and cons to keep in mind:

If qualifying for a loan is not an issue for you, you might also consider looking into a fixed home equity loan or a HELOC. As with a cash-out refi, both loan types come with their own benefits, which might suit your situation better than a refinance. However, if you’d rather stick to having only one mortgage loan at a time, and the easier qualification and application processes appeal to you, a cash-out refi just might be the trick.

Be sure to research all your loan options and each lender thoroughly before making a final decision. To make this easier, we offer free comparisons of the top lenders in the industry as well as other useful resources, so you can easily compare all your options.