What Is a Cash-Out Refinance?

| The Truth About Mortgage 12/19/19, 2'42 AM

HOME ABOUT MORTGAGE DICTIONARY THE ARCHIVES

MORTGAGE NEWS MORTGAGE TIPS MORTGAGE 101 MORTGAGE RATES LOAN TYPES REFINANCE VS. CALC

What Is a Cash-Out Refinance? Search This Site

Custom Search

Get a Free Mortgage Rate Quote

Let’s talk mortgage basics. There are two main types of mortgage re9nances
available to homeowners.

There is the standard rate and term re9nance, which allows a borrower to
obtain a lower mortgage rate and/or shorten their loan term, while keeping
their existing loan balance intact.

And then there is the “cash-out re9nance,” which allows a borrower to tap into
the equity (or cash) in their home.

Jump to cash-out refinance topics:

– Should I Take Cash Out?
– Cash-Out Re9nance Examples
– Cash-Out Re9nance Rates
– How Much Can I Cash Out?
– Reasons to Pull Cash Out?
– Cash-Out Re9nance Rules
– Cash-Out Re9nance Tax Implications

Mortgage Q&A
10 Ways to Save Money on Your Next Mortgage

Are Mortgage Points Worth It?

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 1 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

Do I Qualify for a Mortgage?

Do You Need 20% Down to Buy a House?

How Are Mortgage Rates Determined?

How Much House Can I Afford?

How to Move Out of Your Parents House

How to Pay Off the Mortgage Early

How to Reduce Closing Costs on Your Mortgage

How Does a Cash-Out Refinance Work?
Should I Lock or Float My Mortgage Rate?
Like a typical mortgage re9nance
Should I Rent or Buy a Home?
You replace your existing home loan(s) with a new one
Tips for First-Time Home Buyers
But the new loan balance will be larger thanks to the cash out portion

Which is extracted from your available home equity Top 10 Mortgage Mistakes to Avoid

The cash can then be used for whatever purpose you choose What Credit Score Do I Need to Get a Mortgage?

Put simply, if you’ve paid down your current mortgage balance and/or home What Is a Mortgage Broker?

prices have increased since purchase, you may have equity in your home that
you can access via cashout re9nancing to use for other expenses, such as
funding home improvements, paying for college tuition, or paying off credit
cards.

With today’s mortgage rates so attractive, it might be possible to re9nance your

mortgage, get cash out, and obtain a lower interest rate, all in one transaction.
This might be especially true if the value of your home has increased
signi9cantly since you took out your original mortgage.

Let’s learn more about what a cashout re9 is, the pros and cons, and how this
loan option can quickly replenish your savings account to pay for other bills.

Do You Want Cash Out with That?

If you apply for a mortgage re9nance

You will probably be asked if you want cash out

And if so how much you need

But it’s totally optional and any cash you take must be paid back along
with the original loan balance

When mortgage re9nancing, if a borrower elects to take “cash out” in addition

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 2 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

to changing the rate and term of their existing home loan, the new mortgage
balance will be larger than the original. That’s right, these funds don’t appear
out of thin air, nor is it free money, even though you get cash in hand!

I kind of liken this to the old line, “Do you want fries with that?” But instead it’s,
“Do you want cash out with your home re9nance?”

In short, you’re taking out a larger loan when you execute a cash out re9nance,
which means monthly payments will likely be higher. You can use my
mortgage payment calculator to see how much more you’ll pay each month.

Once the re9nance loan is complete, the new loan will consist of the original
balance prior to the re9nance plus the desired cash out amount, less closing
costs. So expect both the size of your mortgage and your mortgage payment
(depending on interest rates) to increase in return for a cold, hard lump sum of
cash.

As noted, if you are able to snag a lower interest rate and get cash from your
home, you’ve hit a home run! You’re saving money and you’ve got money in the
bank.

Get a Cash Out Refinance or Open a Line of Credit (HELOC)?

You may have the option to re9nance your existing mortgage and pull out
cash

Or simply open a second mortgage behind it

Such as a HELOC or home equity loan

To avoid restarting your loan term and/or losing your low interest rate

If you’ve got ample equity in your home, you’ve got multiple re9nance options
at your disposal, along with another loan type that won’t disrupt your loan term
and payoff goals.

There are essentially two main ways a borrower can tap into their home equity.

They can either open up a home equity loan or home equity line of credit, also
known as a HELOC, behind their existing 9rst mortgage, or re9nance their
current mortgage(s) and take cash out in the process.

Some Cash Out Refinance Examples to Help Illustrate

Let’s look at an example where a homeowner wishes to get $100,000 cash
out of their home:

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 3 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

Home value: $500,000

Existing liens: $300,000 (fancy way of saying current loan balance)
Home equity: $200,000

In the above example, the homeowner has an existing mortgage balance of

$300,000. The home has a current market value of $500,000, so the
homeowner has $200,000 in home equity. In other words, the homeowner
essentially owns $200,000 of their home, or 40% of the current property value.

As mentioned, if the homeowner wishes to tap into that equity, they can either
get a second mortgage (HELOC or home equity loan) or execute a cash-out
re9nance.

Let’s assume the homeowner opts to add a second mortgage via a HELOC:

Home value: $500,000

Existing liens: $300,000
HELOC: $100,000 (behind the 1st mortgage)
Home equity: $100,000

In the above example, the homeowner adds a second mortgage behind their
existing $300,000 9rst mortgage. The $100,000 home equity line they added
increases their existing loan balance to $400,000, and subsequently lowers the
equity in their home to $100,000.

But the homeowner now has a $100,000 credit line (tied to the prime rate) to
use for whatever they wish, without changing the rate or term of the current
loan. This is NOT a cash-out re9nance.

Now let’s assume they execute a cash-out reEnance by reEnancing their

existing loan and adding cash out:

Home value: $500,000

Existing liens: $300,000
Cash-out re9nance: $400,000 ($400,000 new 1st mortgage, no 2nd mortgage,
$100k cash goes to borrower)
Home equity: $100,000

In this example, the homeowner re9nances their original $300,000 mortgage

and takes an additional $100,000 cash out, creating a new $400,000 mortgage.

The amount of equity and cash to the borrower are the same in this scenario
as in the 9rst example.

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 4 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

The only difference is that the homeowner still has a single home loan, as
opposed to two mortgage loans, although it’s a completely new mortgage with
a brand new term and possibly a new interest rate, quite likely with a different
bank or mortgage lender.

So which approach works best? There are pros and cons and it really depends
on the borrower. When looking to execute a cash-out re9nance, it’s important
to decide which method makes sense for your unique 9nancial situation.

If interest rates are low at the time you’re looking to cash out, you may want to
re9nance your existing mortgage and consolidate the old mortgage and cash
out into a single loan as we saw in the last example.

If mortgage rates aren’t favorable but you still need cash, it’d probably be best
to leave your 9rst mortgage alone and add a second mortgage behind it. That
way it won’t affect the interest rate of the 9rst mortgage.

Things like remaining loan term must also be taken into account. If your
mortgage is close to being paid off, it may be wise to leave it untouched and
opt for pulling cash out via a second mortgage.

But if your mortgage is new and the interest rate is not all that favorable (or
adjustable), it might make more sense to re9nance the whole kit and caboodle.
In any case, there are re9nance calculators out there to aid you in your
decision.

Why Do People Pull Cash Out of Their Homes?

• Home improvements
• Other investments (stocks, bonds, etc.)
• Vacations and other luxuries
• College tuition
• Home buying (down payment to purchase another property)
• To pay-off other higher-interest-rate debt, such as credit cards or auto loans
• Pay off student loans or a personal loan
• For an emergency (buffer their checking account)
• Because they want cash for any number of reasons

There are countless reasons to re9nance depending on your 9nancial goals.

While a rate and term re9nance can be helpful to lower your monthly payments
and/or drop mortgage insurance, cash out re9nance loans are good for, well,
getting cash.

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 5 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

Many homeowners use cash-out re9nances for debt consolidation, home

improvement, or for future investments. To avoid paying high-interest rate
credit card debt, homeowners may use cash out to pay off those bills.

Instead of paying a 20% interest rate or higher on a credit card each month,
you can pay off that balance using your mortgage and pay a rate of 5-8%
instead.

Just realize the risk involved if you fail to make your mortgage payments. And
consider a balance transfer instead if it’s just credit cards, you might be able to
get 0% APR for a lengthy period of time.

Get the Best Mortgage Rate for You !

Target Home Price
APR/ MONTHLY
$ 250,000 $
LENDER RATE ! PAYMENT !
NMLS# 421860
Purchase or Refinance
○ Purchase Chase Home Lending Sponsored

Refinance 3.923%/
Location 3.875% $940 View Details

30 yr Fixed Conforming • 12/18/2019 • Fees: $1,150 • Points: 0.00

Silver Spring, MD
NMLS# 399798 • State Lic. 399798

Down Payment
Rocket Mortgage Sponsored
20.00 % $50,000
4.930%/
4.875% $1,058 View Details
Credit Score 30 yr Fixed Conforming • 12/18/2019 • Fees: $1,250 • Points: 0.00
Excellent (760+) NMLS# 3030 • State Lic. 3030

Loan Type Quicken Loans Sponsored

# 30 yr Fixed 5.041%/
15 yr Fixed 4.990% $1,072 View Details
7/1 ARM
30 yr Fixed Conforming • 12/18/2019 • Fees: $1,150 • Points: 0.00
5/1 ARM
NMLS# 3030 • State Lic. 3030
3/1 ARM

Filter Results Source: Mortech® & Informa Research Services Disclosure

Other homeowners may pull cash out to make improvements to their home
that will increase the market value signi9cantly, which over time can lower their
loan-to-value ratio and increase the equity in their home.

Others may pull cash out if they feel they can invest the money at a better rate
of return than the mortgage rate.

The question you need to ask yourself is whether it makes sense 9nancially to
re9nance your current mortgage to take advantage of anything mentioned
above.

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 6 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

Keep in mind that there are fees associated with taking out a second
mortgage, and even more if you plan on re9nancing your 9rst mortgage and
taking cash out.

While a cash-out re9nance can provide homeowners with much needed help in
a dire situation, when you cash out, you essentially reset the mortgage clock
and lose all the equity you’ve spent years building. Not only do you lose your
equity, but you also take on more debt.

How Are Cash-Out Refinance Rates?

There is a pricing adjustment for cash-out re9nances

That makes them more expensive than rate and term/purchase loans

How much more expensive depends on things like credit score and LTV

If you have a very high LTV and a very low credit score your mortgage
rate could be very high

They’re generally pretty similar to those of a home purchase or a rate and term
re9nance, though you might expect your mortgage rate to be an .125% or .25%
higher.

In other words, if the rate were 3.625% without cash out, expect the cash out
re9nance rate to be 3.75% or 3.875%, all else being equal.

Depending on the loan amount, that can amount to a few extra bucks or $100
or more per month.

However, if you happen to have marginal or poor credit, your interest rate could
skyrocket if you’re taking cash out. Same goes for a high-LTV loan, and even
worse if you combine the two!

Also note that a re9nance with cash out will obviously be larger, so that can
drive the monthly payment higher as well compared to your original home
9nancing.

Like a purchase mortgage, both 9xed rates and adjustable-rate loan options are
available on a cashout re9, along with interest-only in some cases.

Cash-Out Refinance Frequently Asked Questions:

What is the seasoning requirement for a cash-out reEnance?

Most lenders will not let homeowners take cash out on their property without

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 7 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

12-months seasoning. Meaning that if you buy real estate, you’ll need to sit on
it for at least a year before taking any cash out.

Lenders enacted tougher cash out rules to deter investors from buying homes
with zero money down, and quickly re9nancing them at a higher value and
zapping the equity.

There are some lenders that will allow cash out up to 75% loan-to-value without
any property seasoning, but most homeowners who are looking for quick cash
out usually do not have 25% equity in their homes.

What is the max LTV for a cash-out reEnance?

Seasoning aside, there are typically strict limits on how much cash out you can
take. At the moment, most lenders allow a max LTV of 85% for cash-out
re9nances.

In the “good old days,” you could get cash out at 100% LTV, meaning you could
take out re9nance loans for the full value of your property. Clearly this didn’t go
well once home prices plummeted and lenders were stuck holding the bag.

How much can I cash out reEnance?

After considering the max LTV allowed by your lender, you need to determine
your property’s current appraised value and outstanding loan balance.

Your borrowing may also be restricted by DTI limits if the new, larger loan
balance creates a monthly payment that is too high for your income.

For example, say your home is worth $500,000 and you have an outstanding
loan balance of $300,000. If the lender allows a max LTV of 85%, you could
potentially take out a loan amount of $425,000.

But the lender would have to verify that you could handle monthly payments on
that larger $425,000 loan amount as well.

So max cash out will be determined by both LTV and borrower affordability.

Can I do a cash-out reEnance with bad credit?

It depends how low your credit score is. You can generally get approved with a
credit score as low as 620, which many would consider bad or close to bad.

Of course, your interest rate will be higher to compensate, so it’s often in your
best interest to improve your scores before applying unless you really need the

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 8 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

cash.

This logic applies to all types of mortgages, but can be especially impactful on
cash out re9nances because the pricing adjustments are often higher.

Is my reEnance considered rate and term or cash-out?

Another important note is that a re9nance loan will be likely be considered

cash-out if a borrower re9nances a non-purchase money home equity line of
credit.

That is, if you open an equity line behind your existing 9rst mortgage after the
original purchase transaction and then later want to re9nance it, it will be
treated as a cash-out transaction even if you aren’t taking cash out at that time.

What this may mean to the homeowner is another pricing adjustment when
they re9nance, which will result in a higher interest rate. It’s not the end of the
world, but something to consider.

Many borrowers also feel if they aren’t getting cash in their pocket, their
re9nance isn’t considered cash-out. This is false. If you pay off credit cards or
auto loans and receive zero cash in hand, the bank or lender will still consider it
cash-out, and it will be underwritten as such.

Is a cash-out reEnance taxable?

NO. As mentioned, you aren’t getting free money via the re9nance transaction.
You are taking out a new loan with a larger balance and you must pay it back
(with interest) over time. So there’s no income tax to worry about.

However, you’ll likely have larger monthly mortgage payments to contend with.

Is a cash-out reEnance tax deductible?

POSSIBLY. So we know the cash out isn’t treated as income. But even better, it
may be tax deductible, though there are limits of indebtedness of $750,000
($375,000 if married 9ling separately).

Additionally, regardless of when the indebtedness was incurred, you can

generally only deduct the interest if it was used to buy, build, or substantially
improve your home.

In other words, if the cash was used to fund a home improvement such as a
new bathroom or kitchen renovation in your quali9ed main or second home it

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 9 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

might be deductible if you itemize.

But those paying off non-housing related debt such as student loans or credit
cards with cash out proceeds likely wouldn’t qualify for a tax deduction.

This is covered in IRS Publication 936, though still somewhat confusing to

interpret, especially in light of the Tax Cuts and Jobs Act of 2017. Tax
situations vary so consultation with a CPA may be advisable.

Can I get a cash-out reEnance on a rental property?

Yes, though the LTV limits could be signi9cantly lower. We know the max LTV
is around 80-85% for primary residences. For rental properties, aka investment
properties, you might be looking at a max LTV of 70-75%, or lower. So keep
that in mind before thinking you can tap all that equity!

Can you do a cash-out reEnance with an FHA loan?

Yes, though the LTV limits are again restricted. For FHA loans, the max LTV for
a cash-out re9nance is 85%, down from 95% before the mortgage crisis. HUD
lowered the max LTV as a result of deteriorating conditions in the housing
market.

In other words, if home prices keep dropping and they continue to offer cash
out up to 95% LTV, they’ll lose their shirt.

Can you get cash out with VA loans?

Yes, as long as you occupy the property as your primary residence. And it may
be possible to get up to 100% LTV 9nancing depending on the circumstances.

Additionally, you can use a VA cash out re9 to re9nance a non-VA loan (FHA
loan, USDA loan, conventional loans) into a VA loan.

Is cashout reEnancing allowed on jumbo loans?

Absolutely! It’s possible to get cash out with your jumbo loan, and the loan
limits might be much higher than other loan options. The downside is the max
LTV might be lower to compensate for risk, so you’ll probably need a fairly large
equity cushion.

Is cash out allowed on a streamline reEnance?

No, streamline re9nances are only intended to help borrowers lower their
monthly mortgage payments and/or move from an adjustable-rate product to

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 10 of 26
What Is a Cash-Out Refinance? | The Truth About Mortgage 12/19/19, 2'42 AM

a 9xed-rate product. A cashout loan wouldn’t accomplish that saving money

part.

Where can I get a cash out reEnance?

Pretty much any 9nancial institution that offers home loans will also offer cash
out re9nances. There aren’t really so-called re9nance lenders per se, though
there are certainly lenders whose volume consists mainly of re9nances as
opposed to purchase mortgages.

Any bank, credit union, or mortgage bank should offer these re9nance options.

Will a cash-out reEnance take longer to pay back?

With any mortgage re9nance, it is important to understand the costs involved

and the underlying motivation. You should avoid serially re9nancing your
mortgage if at all possible.

Aside from the associated costs, if you constantly take cash from your home,
you will set yourself back in paying off your mortgage, and wind up paying
more interest than if you simply left the mortgage alone.

You could also land yourself in a negative equity position. That’s why a cash
out re9nance should really only be reserved for times of great need, or in times
when rates are simply too good to pass up. Do your homework (lots of it) and
run the numbers through a mortgage calculator before making a decision!

Tip: When to re9nance a mortgage.

Compare the Top 10 Mortgage Refinance Options Near You

Select your state to get started

State

https://www.thetruthaboutmortgage.com/cash-out-refinance/ Page 11 of 26