Best Cash-Out Refinance Lenders of 2022

More of NerdWallet's best cash-out refinance lenders

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." How much cash 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 find out how much you can borrow, and 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 home improvements, education expenses or debt consolidation.

» MORE: Browse top mortgage refinance lenders

Pros of a cash-out refinance

Potentially lower interest rate. Though cash-out refinance rates tend to be higher than rates for purchase loans, you might still end up with a lower interest rate if mortgage rates were higher when you originally bought your home. (However, 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, a home equity line of credit or a home equity loan, or by using credit cards.

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.

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. This can take a big bite out of the cash you'll receive at closing. And if you borrow more than 80% of your home's value, you'll have to pay for private mortgage insurance.

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 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.

» MORE: Best home equity loan lenders

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