Cash-out refinance

A cash-out refinance is similar to regular mortgage refinancing in that you replace your current loan with a new mortgage. However, with a cash-out refinance you take out a larger loan and receive the difference between your new mortgage and what you owe on your original mortgage in cash.

For example, let’s say your home is worth $250,000 and you owe $150,000, giving you $100,000 in home equity. If you borrow up to 80% of your home’s value, your new mortgage could be $200,000. After paying off your existing $150,000 mortgage, you would receive $50,000 in cash, minus closing costs.

Applying for a cash-out refinance typically triggers a hard inquiry into your credit history, which may cause your credit score to dip. The effect is usually temporary, especially if you manage the loan responsibly and make on-time payments.

Yes, just like with your first mortgage, cash-out refinances will include closing costs. Closing costs include fees paid to third parties such as appraiser, the title company and other closing expenses. Closing costs are normally based on a percentage of the loan amount.

No. The cash you receive from a cash-out refinance is generally not taxable because it’s considered loan proceeds, not income. You may be able to deduct some of the interest on the new loan if you itemize deductions and use the funds to buy, build, or substantially improve the home securing the loan.

However, everyone’s tax situation is different, and tax rules may change. Consider consulting a tax professional to understand how a cash-out refinance may affect your taxes.

Getting a cash-out refinance is similar to getting a regular mortgage refinance. You'll most likely need to meet certain requirements, such as a good credit score and low debt-to-income ratio. Perhaps the most important factor is your home's equity. Most lenders require you to keep at least 20% equity in your home after the refinance. That often means borrowing no more than 80% of your home’s value.

Appraisals are normally required for a refinance. Talk to a mortgage consultant to learn more about refinancing.

You might want to ask about the costs, risks and long-term impact of the loan. Here are a few questions to consider asking:

• What interest rate or annual percentage rate (APR) would I qualify for?
• How much cash could I take out?
• What are the closing costs and fees?
• What will my new monthly payment be?
• Will the loan have a fixed or adjustable rate?
• Are there prepayment penalties or restrictions?
• How will this refinance affect my remaining equity?

You can see the answer to some of these questions in the loan estimate, such as the interest rate and APR, projected monthly payment, closing costs and prepayment penalties. However, discussing them with the loan officer before you apply can help you better evaluate your options.

Whether or not a cash-out refinance is a good idea depends on your situation, so you want to weigh the benefit of how you’re going to use the money against the amount of time it will take to pay off the loan. This may mean considering:

• The number of years left on your current loan
• Term of the new loan
• Current interest rates
• Monthly payment amount
• Total cost of borrowing
• The break-even point

Because a cash-out refinance requires you to take out a new, larger loan with terms that may differ from your original loan — including new closing costs and other fees — you’ll want to think carefully about how you use the money and whether the short-term benefits outweigh the long-term costs.

Get a personalized rate quote to see how much you may be able to borrow with a cash-out refinance.