10 min read
What Is Cash-Out Refinancing?
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What is cash-out refinance? It is a mortgage option that lets homeowners replace their existing home loan with a new one and, in the process, convert a portion of their built-up home equity into cash. In other words, if you have substantial equity in your property, you can refinance it for a loan amount that exceeds what you currently owe. The difference between the new loan’s principal and your remaining mortgage balance is then disbursed to you as a lump sum of cash.
A cash-out refinance can be a powerful way to consolidate debt, fund home renovations, or address pressing financial needs. Moreover, mortgage refinance rates are often lower than those of credit cards or unsecured loans. So, how does a cash-out refinance work? Read on for details and the pros and cons.
Lesson Notes:
- Cash-out refinance replaces your mortgage with a larger loan.
- Use home equity cash for debt, renovations, or emergencies.
- Loan terms, interest rates, and closing costs affect refinancing costs.
- Best for long-term financial goals and stable repayment ability.
LESSON CONTENTS
How does a cash-out refinance work?
If you have built up significant home equity, you can utilize it via a cash-out refinance. Here is how you do it.
Determine your available equity
Compute equity by subtracting your mortgage balance from your home’s current market value. If your home is appraised at $400,000 and you owe $250,000 on your mortgage, your equity amounts to $150,000.
Estimate your cash-out
Typically, most lenders allow you to borrow up to 80 percent of your home’s value – in this case: $400,000 x 80% = $320,000. But first, you must pay your outstanding mortgage balance of $250,000. Therefore, your total cash-out will be the balance: $320,000 - $250,000 = $70,000.
Apply for the refinance
After shopping for rate deals from various lenders, apply for a cash-out refinance with the best option. Often, a credit union like Ent Credit Union offers favorable cash-out refinance rates and better support than banks. The lender assesses your debt-to-income (DTI) ratio, credit score, current income, and the property’s appraised value to decide if you meet their eligibility criteria and what cash-out refinance rates you qualify for.
Close the new loan
Upon approval, you’ll close on the new loan, which pays off your existing mortgage. The new mortgage amount is typically higher if you’re taking cash out. For example, if you refinance into a $300,000 loan but owe $250,000, you would receive $50,000 as a lump sum at closing.
Repayment under new terms
After your loan closes, you’ll start making monthly payments on the new mortgage. Ensure you understand the new terms to avoid missing payments and putting strain on your budget.
What can you use a cash-out refinance for?
One of the main advantages of a cash-out refinance is its versatility. The lump sum you receive can address multiple financial priorities or challenges, such as:
- Debt payoff or consolidation: The Consumer Financial Protection Bureau found that between 43.5 and 45.2 percent of borrowers in 2020 and 2021 used cash-out refinance to “pay off other bills or debts” (CFPB, 2025). Like other Americans, you can use a debt consolidation refinance to settle higher-interest debts like credit cards and unsecured personal loans.
- Home improvements: For example, remodeling your kitchen, upgrading the bathroom, or adding solar panels.
- Education: If you have equity, a cash-out refinance might be cheaper than using private student loans.
- Emergency expenses: Medical bills, legal fees, or other unforeseen costs.
Pros and cons of cash-out refinancing
There are several benefits to cash-out refinancing. According to the Journal of Light Construction (2024), homeowners who tap into their equity for renovations such as garage door replacements often see a significant return on investment.
Other benefits include
Lower interest rates
Mortgages tend to have lower interest rates than personal loans or credit cards. You lower your overall interest costs by paying high-interest debt using a cash-out refinance mortgage.
Lump sum cash
You obtain immediate access to funds for major projects or urgent financial obligations.
Financial flexibility
Because you’re free to use the funds as you see fit, a cash-out refinance can help you handle a variety of financial goals.
Tax benefits
If you direct the funds to home improvements, the interest portion on that segment of the loan is tax-deductible.
Cons
In certain circumstances, a cash-out refinance can be disadvantageous. Here are some cons to consider:
Closing costs
Like any mortgage, a cash-out refinance involves closing costs, such as appraisal fees, title costs, and lender charges. These fees can reach 3% to 6% of the total loan (Freddie Mac, 2025).
Longer loan term
Refinancing might reset your repayment schedule to 15 or 30 years.
Risk of foreclosure
By increasing your mortgage balance, you risk losing your home if you don’t meet your monthly payments.
Reduced home equity
Pulling out cash decreases the equity you hold in your property. If the market declines, you could end up with less equity than you anticipated, or in worst cases, end up underwater on your mortgage (owing more than the property is worth).
Is a cash-out refinance right for you?
With an understanding of what a cash-out refinance is you can assess whether it aligns with your needs. Ask yourself these questions:
What are my goals?
Evaluate how the cash-out refinance fits with your financial goals. For example:
- Short-term: Does it lower my monthly debt payments or address an urgent expense?
- Long-term: Will this refinance align with retirement savings goals or future property plans?
Can I comfortably manage the new mortgage payment?
Even if the interest rate is lower, your payment could rise if you borrow substantially more.
How long will I stay in this home?
Will you recoup closing costs? If you plan to move soon, the fees might not be worth the short-term benefits. Also, consider market trends. Is your local real estate market stable, rising, or at risk of decline? You might end up underwater on your mortgage if home values in your area drop.
Do I have a strong plan for the cash?
If you’re financing home improvements or consolidating debt, outline exactly how those projects or payments will improve your finances. For debt consolidation, make sure you won’t run up new credit card balances again.
By honestly reviewing these questions, you’ll determine if a cash-out refinance suits your financial objectives and risk tolerance.
How to qualify for a cash-out refinance with a credit union
Credit unions are member-owned financial institutions that provide competitive interest rates and a more personalized service than some larger banks. Qualifying for a cash-out refinance credit union loan typically involves the following:
- Credit score requirements: A score of 620 is the standard minimum. Higher scores secure better cash-out refinance rates.
- Sufficient equity: Most mortgage lenders require at least 20 percent home equity in the home to qualify.
- Low debt-to-income (DTI) ratio: Your monthly debt obligations (mortgage, credit cards, car loans, etc.) should not exceed 43% of your gross monthly income.
- Stable employment and income: Lenders will look at pay stubs, bank statements, and possibly tax returns (usually up to two years’ worth) to verify reliable income.
- Home appraisal: Your property’s current market value should be high enough to support the refinanced loan amount. If the appraisal comes in lower than expected, you might not qualify for as large a cash-out sum.
Comparing cash-out refinancing vs. other home equity options
Besides cash-out refinancing, you can access your home equity in other ways — a home equity loan or a home equity line of credit (HELOC). Understanding how they differ can help you choose the best fit. So, let’s first define them.
Home Equity Loan: A second mortgage that leaves your original mortgage untouched. You receive a one-time lump sum. Typically, it offers a fixed interest rate and predictable monthly payment, but the downside is that you have two separate loans to manage.
HELOC (Home Equity Line of Credit): A credit union home equity line of credit is a revolving borrowing facility secured by your home. You can access borrowings up to a set limit during the draw period. One major advantage is the flexibility to borrow as needed. Secondly, you only pay interest on what you use. Often, HELOCs feature variable interest rates, leading to fluctuating payments.
Here is a side-by-side comparison of the three alternatives:
|
|
Cash-Out Refinancing |
Home Equity Loan
|
HELOC (Home Equity Line of Credit) |
|
What it is |
A new larger mortgage replacing existing one, receiving the difference as cash |
A second mortgage taken in a lump sum, secured by your home |
A revolving line of credit secured by your home’s equity |
|
Impact on First Mortgage |
Replaces existing mortgage |
Leaves first mortgage intact; adds a separate second mortgage |
Leaves first mortgage intact and adds a revolving credit account |
|
Access to Funds |
Cash lump sum |
You receive a lump sum |
Draw from credit line as needed up to set limit |
|
Interest Rate |
Fixed-rate or adjustable-rate |
Fixed-rate |
Often variable (adjustable) |
|
Payment |
One monthly payment |
Two payments (existing mortgage plus home equity loan). |
Draw Period: Pay interest on only what you borrow. |
|
|
|
|
Repayment Period: Principal and interest repayment |
|
|
Fixed monthly payment |
Fixed monthly payment |
Variable monthly payments |
|
Closing Costs |
3 – 6% of the new loan |
3–6% range of the loan amount |
None or relatively small |
|
Ideal For |
Best for a single, substantial need (e.g., major renovation, debt consolidation) |
Best for a one-time, predictable expense (e.g., home improvement, education) |
Ideal for ongoing or unpredictable needs (e.g., multiple projects or emergency funds) |
Tips to maximize the benefits of your cash-out refinance
To ensure you’re getting the most out of a cash-out refinance, consider these strategic steps:
- Shop around for the best rate: Get multiple quotes and compare closing costs and prepayment penalties.
- Create a clear financial plan: Decide upfront how you’ll use the lump sum, whether it’s paying off debt or funding home improvements.
- Avoid over-borrowing: Tapping too much equity decreases your stake in the property and increases monthly payments.
- Prioritize high-ROI home improvements: If you’re using the cash for renovations, focus on areas known to boost property value, like kitchen remodels, bathroom upgrades, or garage door replacements.
- Automate your payment schedule: After refinancing, set up auto-payments to avoid late fees or penalties.
FAQs
What is the minimum credit score needed for a cash-out refinance?
Most lenders require a minimum score of around 620, though some accept lower scores under specific programs. Higher scores typically secure better cash-out refinance rates and loan terms.
How much equity do I need in my home to qualify?
Typically, you need at least 20% equity. This ensures you aren’t borrowing more than 80% of your home’s appraised value.
Will a cash-out refinance increase my mortgage payments?
It depends on factors like the new loan amount, interest rate, and term. Even if you secure a lower interest rate, borrowing a larger principal could raise your monthly payment. Conversely, if the interest rate drops significantly and you maintain a similar term, your monthly payment might stay the same or decrease.
Are there any fees or closing costs involved?
Yes. Like any mortgage transaction, closing costs include appraisal fees, title searches, and lender fees. These range between 3% and 6% of the total loan amount, although some lenders allow you to roll these into the new mortgage.
How is a cash-out refinance different from a home equity loan or HELOC?
- Cash-out refinance: Replaces your existing mortgage and provides cash based on your home equity.
- Home equity loan: A second mortgage where you retain your original mortgage and take out a lump sum, at a fixed interest rate.
- HELOC: A line of credit secured by your home, allowing you to borrow multiple times up to a certain limit, usually with a variable interest rate.
Citations
Consumer Financial Protection Bureau (January 2025). Cash-Out Refinances and Paydown Behavior of Nonmortgage Debt Balances. https://files.consumerfinance.gov/f/documents/cfpb_cash-out-refinances-and-paydown-behavior-of-non-mortgage-debt-balances_2025-01.pdf
FreddieMac (2025). Understanding the costs of refinancing. https://myhome.freddiemac.com/refinancing/costs-of-refinancing
Journal of Light Construction (2024). 2024 Cost vs Value Report. https://www.jlconline.com/cost-vs-value/2024/
*PLEASE NOTE: This article is intended to be used for informational purposes and should not be considered financial advice. Consult a financial advisor, accountant or other financial professional to learn more about what strategies are appropriate for your situation.
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