Best for: No application fees
Rocket Mortgage, LLC
NMLS#3030
Rocket Mortgage, LLC
Best for: Rate transparency and customer experience
New American Funding
NMLS#6606
New American Funding
NBKC
NMLS#409631
NBKC
Better
NMLS#330511
Better
Best for: Flexible loan terms
Farmers Bank of Kansas City
NMLS#613839
Farmers Bank of Kansas City
Central Bank
NMLS#407985
Central Bank
What's a cash-out refi?
With a cash-out refinance, you replace your current mortgage with a new, larger loan. The difference between your new loan amount and what you owed is how much you "cash out."
How much cash you can get
The amount of cash you can get depends upon your home equity — how much your home is worth minus how much you owe.
Say your home is worth $400,000 and you owe $100,000. That means you have $300,000 in equity.
Most lenders make you keep at least 20% equity in your home. In the example above, the house is worth $400,000, and 20% of that is $80,000. You could borrow up to $320,000 in a cash-out refinance: the $400,000 value minus $80,000 in equity.
Also, the bank won't lend you more than you can afford to repay every month. That could limit the amount you can borrow.
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 just what you've gained from paying down principal.
When getting a cash-out refinance, you can use the money however you wish. However, since the loan is secured by your house, you risk foreclosure if you can’t pay it back. Funds from a cash-out refinance can be helpful to pay for:
Large-scale home improvements or renovations
Education expenses
Nerdy Tip
What if you’ve gotten a cash-out refinance before, but want to do it again? Most loans have a waiting, or “seasoning,” requirement of at least six months. Within that guideline, you can refinance as often as you want — but you’ll pay closing costs each time.
Home equity loans or lines of credit are alternatives for tapping a portion of home equity without refinancing your entire mortgage.
Pros and cons of a cash-out refinance
Pros
- Potentially lower interest rate (if rates dropped since your purchase)
- Simple repayment: One loan, one bill to remember
- Access more funds at a lower rate than with a personal loan or credit card
Cons
- Potentially higher interest rate (if rates went up since your purchase)
- Risk of foreclosure if you can’t make the payments
- Closing costs run 2%-6% of the new loan amount
- Funds aren’t instant: Underwriting can take weeks
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, but is secured by your home. 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 can’t take any more money out, and you'll pay back the principal plus interest.
HELOCs offer flexibility. Many have variable rates, so your monthly payment could increase over time.
» MORE: Best HELOC lenders
Home equity loans
If you know exactly how much you need to borrow, you might 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 you can keep your existing rate on your primary mortgage.
» MORE: Best home equity loan lenders
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