Best Cash-Out Refinance Lenders of December 2024

How does a cash-out refinance work?

With a cash-out refinance, you're getting a new loan that's for more than you owe on your current mortgage. The difference between your new loan amount and what's owed is where you get the "cash out." The amount of cash you can get depends upon your home equity — how much your home is worth compared to how much you owe.

Say your home is valued at $200,000 and your mortgage balance is $100,000, giving you $100,000 of equity in your home. You could refinance your $100,000 loan balance for $150,000 and receive $50,000 in cash at closing.

You'll need an appraisal to determine your home's current value. If your home has increased in value since you bought it, you may have more equity than what you've accrued from paying down your principal. Most lenders will require you to maintain at least 20% equity in your home. Many people use the cash from a cash-out refinance to fund large-scale home improvements, education expenses or debt consolidation.

Home equity loans or lines of credit are alternatives for tapping a portion of home equity without refinancing the entire mortgage.

Pros of a cash-out refinance

Potentially lower interest rate. Cash-out refinance rates tend to be higher than rates for purchase loans. But if mortgage rates were higher when you originally bought your home, a cash-out refinance could result in a lower interest rate. If you only want to lock in a lower interest rate on your mortgage and don’t need the cash, a rate-and-term refinance makes more sense.

Just one loan. Since it's a refinance, you'll be dealing with one loan payment per month. Other ways of leveraging home equity require a second mortgage.

Access to more funds. Cash-out refinances are helpful with major expenses, because you generally can borrow much more than you could with a personal loan or by using credit cards. While cash-out refinance interest rates are often higher than rates for other types of mortgages, they're generally lower than the interest rate you'd get with a personal loan or a credit card.

Cons of a cash-out refinance

Foreclosure risk. Because your home is the collateral for any kind of mortgage, you risk losing it if you can’t make the payments. If you do a cash-out refinance to pay off credit card debt or finance college tuition, you'll be paying off unsecured debt with secured debt — a move that's generally discouraged because of the possibility of losing your home.

Potentially higher interest rate. If mortgage rates have increased since you bought your home, you may think twice before refinancing. With a cash-out refi in a rising rates environment, you'd be moving to a larger loan with a higher interest rate. In that case, a second mortgage such as a home equity loan or line of credit could be a more appealing option. With a second mortgage, you don't touch the interest rate on your primary loan.

New terms. Your new mortgage will have different terms from your original loan. Double-check your interest rate and fees before you agree to the new terms. Also, take a look at the total interest you'd pay over the life of the loan. Assuming you're refinancing into a new 30-year mortgage, that could add years of repayment — possibly piling on a substantial amount of interest, even if you've lowered your rate.

Time-consuming. You're getting a new mortgage, and while you won't jump through all the hoops of a purchase loan, underwriting can still take weeks. If you need funds urgently — say your leaky roof is causing serious water damage and needs replacing ASAP — refinancing may not be your best bet.

Costs. You’ll pay closing costs for a cash-out refinance, as you would with any refinance. Usually between 2% and 6% of your principal amount, this can take a big bite out of the cash you'll receive at closing.

Alternatives to a cash-out refinance

A cash-out refinance isn't the only way to tap your home's equity. You can also explore a HELOC or a home equity loan.

HELOCs

A home equity line of credit, or HELOC, works like a credit card: You’re able to borrow up to a certain limit, repay some or all of what you took out, then do it again as needed. The lender uses your home’s value to set the HELOC limit. You may borrow during a draw period that lasts for several years and pay interest only on the balance. After the draw period ends, you may no longer take money out, and you pay the principal plus interest.

HELOCs offer flexibility, but because many have variable rates, your monthly payment may increase over time.

» MORE: Best HELOC lenders

Home equity loans

If you know exactly how much you need to borrow, you may consider a home equity loan, which you receive as a lump sum and pay back at a fixed rate. Home equity loan rates are generally higher than cash-out refinance interest rates, but since you'll likely borrow a smaller amount than you would with a cash-out refi, the math may still be in your favor.

» MORE: Best home equity loan lenders

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