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If you need access to cash to reach big financial goals, there are plenty of ways to access money, such as using a credit card or taking out a personal loan.
If your home's value has increased since you bought it, you may be able to get the funds you need through a cash-out refinance.
Cash-out refinances come with lower rates than credit cards or personal loans. They also typically have lower rates than home equity loans or HELOCs since they're first mortgages, so they're considered less risky for the lender.
A cash-out refinance is a mortgage that lets you turn the equity in your home into cash at closing. With a cash-out refinance, you take out a mortgage larger than the amount you still owe on your house, and you receive in cash the difference between what you owe on your current mortgage and the new cash-out mortgage.
This is different from a standard rate-and-term refinance, where you replace your current mortgage with a new one of the same size, but with a new rate or term length. This type of refinance can help you snag a lower interest rate or lower monthly payments.
The money you receive with a cash-out refinance can be used however you see fit. Often, homeowners will use this cash for things like debt consolidation or making home improvements.
The amount you're allowed to receive in cash may depend on your lender, but as a general rule of thumb, you can't borrow more than 80% of your home's value. This way, you keep at least 20% of your equity in the home.
Let's say your home is valued at $250,000, and you have $100,000 left to pay on your initial mortgage. This means you have $150,000 in home equity.
To determine the maximum amount you could take out, multiply your home's value by 80%, or 0.80. Then, subtract your current mortgage balance to find out how much cash you could potentially get at closing.
250,000 × 0.80 = 200,000
200,000 − 100,000 = 100,000
So in this example, you could take out a loan up to $200,000, pay off your existing $100,000 mortgage, and pocket the remaining $100,000.
Keep in mind that you'll still pay the additional costs that come with taking out a home loan, including appraisal fees, origination fees, and closing costs.
A cash-out refinance can be a good option for borrowers who want to take out a large sum of cash at a relatively low rate. But the trade-off is that you'll be forfeiting some of the equity you've built up over the years, which can be risky.
But this can ultimately be a smart financial move. For example, many borrowers use their funds to pay for value-boosting home upgrades, which can pay off down the road when they go to sell the home.
Whether a cash-out refinance is right for you depends on your goals, how much money you need, and your overall financial situation.
No, funds from a cash-out refinance are considered a loan, not income, meaning you won't pay income taxes on that money.
It depends on the lender, but typically you can get a loan for up to 80% of your home's value. Some lenders may allow higher amounts. Keep in mind that you'll only be able to pocket the loan amount minus what you currently owe on your existing mortgage. You'll also need to pay closing costs.
A cash-out refinance can be a good way to pay for projects you need to complete or to pay off high-interest debt. But mortgage rates are relatively high right now, so refinancing means you'd likely be taking on a higher rate than what you currently have.
Remember to look at the whole picture, including your new monthly payment amount. If getting a cash-out refinance would put a strain on your budget, it's probably not a good idea.
You may have a slightly higher rate on a cash-out refinance than you would with a standard refinance, since they're riskier for the lender.