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What It Is And How It Works

Ever find yourself deeper in debt than expected or hit with surprise bills that throw your finances off balance?

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These situations happen more often than we like to admit. A cash-out refinance loan* can help by converting your home equity into cash, giving you the flexibility to get your budget back on track.

What is a cash-out refinance?

In simple terms, a cash-out refinance lets you access your home equity when your property is worth more than your current mortgage balance. Instead of taking out a second loan, you replace your existing mortgage with a new, larger one and receive the difference in cash.

 

The amount you can get depends on your home equity—the difference between your home’s current value and what you still owe on your mortgage. If your home’s value has increased over the years, now could be a great time to see if a cash-out refinance makes sense for you.

How does a cash-out refinance work?

Like any mortgage, qualifying for a cash-out refinance requires meeting your lender’s criteria. Key factors include:

  • Home equity minimum: Lenders require a certain amount of equity in your home to approve a cash-out refinance.

  • Debt-to-income ratio (DTI): Lenders assess whether you can afford the new monthly mortgage payment.

  • Loan-to-value ratio (LTV): This helps determine how much cash you can access based on your home’s current value.

Example:
A few years ago, John bought a $300,000 home with a $200,000 mortgage. After regular payments, he owes $100,000, and his home’s value has risen to $350,000. John now has $250,000 in home equity. By taking a $150,000 cash-out refinance, he replaces his current mortgage with a $250,000 loan and receives $150,000 in cash to use however he wishes.

Does a cash-out refinance change your interest rate?

Your interest rate with a cash-out refinance depends on current market rates at the time you close. If market rates are higher than your original mortgage, your new rate may increase. Conversely, if rates are lower, you could secure a lower interest rate with your cash-out refinance.

Can you refinance a home equity loan?

If you’ve previously taken out a home equity loan, you might be wondering if refinancing is possible. In most cases, it is. Begin by speaking with a PrimeLending home loan expert to explore all your refinancing and mortgage options.

Is a cash-out refinance a good idea?

Whether a cash-out refinance is right for you depends on your personal situation. Because you can use the cash payout however you like, it can be a smart choice if it aligns with your budget and financial goals.

Pros and cons of cash-out refinancing

Like any financial decision, a cash-out refinance comes with pros and cons. Understanding both can help you make an informed choice.

Pros:

  • Access a large sum of cash by tapping into your home equity. Use it for:

    • Education or tuition

    • Medical bills

    • Home renovations

    • Vacations

    • Debt consolidation

  • Refinance for a predictable payment plan

  • Potentially secure a lower interest rate or better loan terms

  • May improve your credit score

Cons:

  • Requires a new credit check and home appraisal, with closing costs similar to your original mortgage

  • Extends the repayment period, meaning you may be in debt longer

By weighing these factors, you can decide if a cash-out refinance fits your financial goals.

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