What Is a Cash-Out Refinance, and Is It Worth It?

A cash-out refinance replaces your existing mortgage with a larger one and gives you the difference in cash, letting you borrow against the equity you have built. Because the debt is secured by your home, the rate is far lower than most other borrowing, which makes it powerful for the right purpose and dangerous for the wrong one.

Here is how it works, what it costs, and when it is a smart move.

How it works

Say your home is worth $400,000 and you owe $200,000. You have $200,000 of equity. A cash-out refinance might replace your loan with a new $260,000 mortgage, paying off the old $200,000 and handing you $60,000 in cash. Your balance, and usually your payment, rises, and the new rate applies to the whole loan, not just the cash you took.

Most lenders cap a cash-out refinance around 80 percent of the home's value, which limits how much you can pull. See your numbers above.

The real costs

Two costs matter. First, closing costs, typically 2 to 5 percent of the new loan, due at signing. Second, and easy to miss: if current rates are higher than your existing mortgage, you raise the rate on your entire balance to access the cash, which can cost far more than the cash is worth. Weigh both before deciding.

When it makes sense

A cash-out refinance shines for value-adding home improvements (borrowing against the home to improve the home) and for consolidating high-rate debt into a much lower mortgage rate, if the spending habit behind that debt is fixed. It is a poor idea for funding vacations, cars, or lifestyle, where you trade long-term, home-secured debt for short-term wants. And if you only need the equity as a backup, a HELOC may be cheaper and more flexible.

Compare it against a HELOC before committing, and run the new payment above.

Frequently asked questions