Cash-Out Refinancing

What Is a Cash-Out Refinance?

A cash-out refinance replaces your existing mortgage with a new, larger loan. The difference between the new loan amount and your previous mortgage balance is paid to you in cash, offering flexibility for financing projects or paying off high-interest debts. For example, if your home is valued at $400,000 and your mortgage balance is $250,000, a lender may allow you to refinance up to 80% of your home’s value—giving you access to $70,000 in cash.  

How Cash-Out Refinancing Affects Home Equity

Home equity is the difference between your mortgage balance and your home’s market value—essentially the portion of the home you own outright. When you opt for a cash-out refinance, you’re withdrawing from your equity, which adds to your loan balance and reduces your ownership share. To qualify, most lenders require at least 20% equity in your home.
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Debt Consolidation and Interest Savings

One significant advantage of a cash-out refinance is its potential for debt consolidation. By rolling higher-interest debts, such as credit cards or personal loans, into your mortgage, you can pay down these debts at a lower interest rate and simplify your finances. Many homeowners find that this consolidation saves money over time, given that mortgage rates are typically lower than other types of interest.

Cash-Out Refinancing vs. HELOC

Both cash-out refinancing and home equity lines of credit (HELOCs) allow you to access home equity, but they differ in structure and usage. With cash-out refinancing, you have one monthly payment for a larger mortgage, while a HELOC is a second loan with separate payments. A HELOC also functions more like a credit card, providing a revolving line of credit you can draw from as needed within a set time frame.

A cash-out refinance may be preferable if you want a single, larger loan at a fixed rate. (Note: CapCenter does currently not offer HELOCs, but we can guide you on the advantages of cash-out refinancing as an alternative).

Cash-Out Refinance vs. Rate Refinance

Another refinancing option is a rate refinance, which allows you to adjust your loan’s rate or term without cashing out any equity. This type is ideal if your primary goal is lowering your interest rate or adjusting your loan term. A rate refinance doesn’t increase your loan balance or give you cash but can provide savings on interest. In contrast, a cash-out refinance results in a larger loan due to the equity withdrawn.

Factors That Influence Interest Rates and Loan Terms

The interest rate and term you secure for a cash-out refinance depend on various factors, such as market conditions, your equity level, and credit profile. Cash-out refinances generally have slightly higher rates than standard refinances due to the larger loan amount and lower equity position. While rates are often fixed, some cash-out refinance loans may offer adjustable rates that vary after an initial fixed period.

Note: With CapCenter, you won’t pay closing costs (not the case with other lenders), so more of your funds can go toward achieving your goals.

Pros and Cons of Cash-Out Refinancing

As with all financial decisions, cash-out refinancing comes with both advantages and potential drawbacks. 

Pros

• Access to Funds: Gain a lump sum of cash at a typically lower interest rate than credit cards or personal loans.
• Debt Consolidation: Simplify payments and potentially lower interest costs by consolidating debt.
• Potential Tax Benefits: Interest on funds used for home improvements may be tax-deductible (consult a tax advisor).

Cons

• Increased Debt Load: Cash-out refinancing raises your loan balance and leaves you with a larger mortgage to repay.
• Higher Interest Rates: Cash-out refinances often have slightly higher rates than standard rate-and-term refinances.
• Closing Costs: Traditional lenders charge closing costs for refinancing, though CapCenter’s Zero Closing Cost loans save you from this expense.