Andrea Riquier – Forbes Advisor
If you’ve built up some equity in your home, a cash-out refinance could be an option to access cash when you need it, such as to remodel your home or consolidate debt. This type of refinance pays off and replaces your existing mortgage with a larger loan, and you’ll receive the difference to use as you wish, minus any closing costs or fees.
As with other kinds of mortgages, interest rates on cash-out refinances tend to fluctuate daily. Because of this, it’s a good idea to both keep an eye on rates as well as to compare your options from as many lenders as possible to find a good deal.
Today’s Cash-out Refinance Rates
What Is a Cash-out Refinance?
If you opt for a cash-out refinance, you’ll take out a new, larger mortgage to replace your existing one. You’ll then receive the difference between the two loans as a lump sum (minus any closing costs or fees), which you can use to cover almost any expense. Repayment terms range up to 30 years.
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Depending on your credit, you might qualify for a lower interest rate through a cash-out refinance. This could be especially helpful as you’ll be increasing the loan amount you’re paying interest on. You can use our mortgage refinance calculator to estimate what your costs with a cash-out refinance might look like.
Keep in mind, though, that cash-out refinances usually come with somewhat higher rates compared to standard rate-and-term refinances as lenders consider them to be a riskier investment. Additionally, the actual rate you receive will depend on if you choose a conventional loan or a loan backed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).
Also remember that just like with any mortgage product, your home is used as collateral for a cash-out refinance. This means you risk foreclosure if you can’t keep up with your payments.
How to Get the Best Cash-out Refinance Rates
Keeping an eye on national averages and advertised rates can help you get an idea of what’s happening in the mortgage market, especially if you consider how rates have fluctuated over time.
To get the best interest rate on a cash-out refinance, be sure to take the time to shop around and compare your options from as many lenders as possible. This can help you not only secure an optimal rate but also find the right lender for your needs.
There are also several factors that can influence the rates you’re offered:
- Credit score. For a conventional cash-out refinance, you’ll generally need a credit score of at least 620. With an FHA loan, you might get approved with a credit score as low as 500, while VA cash-out refinances have no set minimum— but the exact requirements for either of these options will depend on the lender you work with. To qualify for the lowest interest rates available, you’ll typically need good to excellent credit, which usually means having a credit score of at least 670.
- Debt-to-income (DTI) ratio. Your DTI ratio is the amount you owe on monthly debt payments compared to your income. To get approved for a cash-out refinance, your DTI ratio should be no higher than 50%—although some lenders might require a ratio as low as 40%.
How Much Money Can I Get from a Cash-out Refinance?
With conventional and FHA loans, mortgage lenders will typically allow you to draw up to a maximum of 80% of your home’s equity through a cash-out refinance—meaning you must maintain at least 20% equity in your home. An exception to this is a VA cash-out refinance, which allows borrowers to access up to 100% of their home’s equity.
For example, say your home is worth $500,000, and you owe $300,000 on an existing conventional mortgage. To calculate your home’s equity, you’ll subtract the amount you owe in loans secured by your house from its appraised value—so subtract $300,000 from $500,000, which leaves $200,000 in equity.
If the lender allows you to access 80% of this amount, you’ll be able to access up to $160,000 with a cash-out refinance ($200,000 x 0.80 = $160,000). This will leave the required 20% equity in your home.
Keep in mind that to calculate exactly what you’re allowed to borrow, the lender will typically require an appraisal by a trusted third party to determine the home’s value. While the lender orders the appraisal, you as the borrower will have to pay for it as part of your closing costs. You can generally expect an appraisal to cost $300 to $400 for a single-family home while multi-family units can cost up to $600 or more.
How Do I Apply for a Cash-out Refinance?
The application process for a cash-out refinance is very similar to getting your first mortgage. If you’re ready to apply, follow these steps:
- Check your credit. When you apply for a cash-out refinance, the lender will look at your credit to determine if you qualify—so it’s a good idea to check your credit beforehand to see where you stand. You can use a site like AnnualCreditReport.com to review your credit reports for free. If you find any errors, dispute them with the appropriate credit bureau to potentially boost your credit score.
- Consider other requirements. In addition to your credit, the lender will also look at your income and DTI ratio. You’ll also typically need at least 20% equity in your home and a loan-to-value (LTV) ratio no higher than 80%, although some lenders might go higher. Your LTV ratio compares the value of your home to what you owe on your mortgage and is used by lenders to decide the risk of an investment. You can calculate this by dividing your mortgage balance by the appraised value of your home.
- Compare lenders and choose an option. Be sure to shop around and compare your options from as many mortgage lenders as you can—including your current lender—to find the right loan for your needs. Consider not only interest rates but also repayment terms, any fees charged by the lender and equity requirements. After you’ve shopped around, choose the lender that works best for you.
- Complete the application. Once you’ve picked a lender, you’ll need to fill out a full application and submit any required documentation, such as tax returns and bank statements.
- Get your funds. If you’re approved, you can expect the entire closing process to take anywhere from 45 to 60 days. To prevent any delays, be sure to fill out the application as accurately as possible and provide requested documentation quickly. Afterwards, you’ll get a lump-sum payment to use how you’d like.
Why Use a Cash-out Refinance Instead of a HELOC or Home Equity Loan?
In addition to cash-out refinancing, other ways to tap into your home equity include a home equity line of credit (HELOC) or a home equity loan. There are several differences between these types of loans, so whether a cash-out refinance will be better for you than either of these options will depend on your individual situation and financial goals.
To help you decide, here’s how HELOCs and home equity loans compare to cash-out refinancing.
- HELOC: A HELOC is a type of revolving credit that allows you to repeatedly draw on for a certain period of time and then you pay off your credit line. HELOCs generally come with variable rates that can fluctuate with the market, and these rates are usually higher than what you’d get with a cash-out refinance. Also, unlike a cash-out refinance, a HELOC is technically considered a second mortgage, meaning you’ll have to manage payments for both the HELOC and your first mortgage.
- Home equity loan: Unlike a HELOC, a home equity loan is paid out as a lump sum to use how you’d like. Rates on home equity loans are fixed, which means they’ll stay the same throughout the life of the loan. Like with HELOC rates, the rate on a home equity loan will usually be higher than what you’d pay on a cash-out refinance. Home equity loans are also considered to be second mortgages.
If you’re only looking to borrow a small amount, a HELOC or home equity loan might be a better option than a cash-out refinance. But if you want to take advantage of a better interest rate and would prefer to have just one loan to manage, then a cash-out refinance could be the better choice.
Also keep in mind that closing costs for a cash-out refinance tend to be higher than they’d be for a HELOC or home equity loan. This is because a cash-out refinance is essentially a brand-new mortgage, making it costlier to process. Closing costs for a cash-out refinance are typically 3% to 5% of your loan amount while for a home equity loan, these costs can range from 2% to 5%.