A cash-out refinance lets you tap the equity in your home by replacing your existing mortgage with a larger one. You get the difference in cash. Done right, it can be a powerful financial tool. Done wrong, it's how people lose their homes.
How it works
Illustration: $400,000 home, $250,000 first-lien payoff and no other liens. A new $310,000 loan leaves $60,000 before closing costs, payoff interest and adjustments. Those items reduce proceeds unless financed in a larger balance; do not count them twice. Equity is $150,000 before selling costs.
Uses to evaluate against costs and risks
- Renovations: compare actual costs and relevant evidence; a project does not guarantee an equal increase in value.
- Debt consolidation: compare actual rates, term, total interest and fees. Moving unsecured debt to a home-secured loan changes foreclosure risk, and a lower rate can still produce more interest over a longer term.
- Major expenses with no good alternatives (medical, education)
Risky uses of cash-out
- Discretionary spending (vacations, cars, lifestyle)
- Investing in volatile assets — you're using your home as collateral
- Paying off debt without addressing the spending behavior that created it
Your home secures the new loan. Its payment can rise or fall depending on balance, rate, term and other charges; more principal alone does not prove the new monthly payment is higher. Failure to make required payments can put the home at risk.
Cash-out refinances come with full closing costs, just like a purchase loan. Evaluate the break-even and total cost before proceeding. Consult a licensed loan officer.