What is a Cash-Out Refinance?

You may have heard people talking about cash-out refinancing as a solution to various financial scenarios. If you've ever wondered how a cash-out refinance works, or you are curious about whether it might be the right fit for your financial goals this year, this article is for you.

Qualifying for a cash-out refinance may be more in reach than you think. To learn more about getting approved for cash-out refinancing, even as a self-employed applicant, talk with one of our loan officers any time.

What is a cash-out refinance?

Refinancing is the process of starting an entirely new mortgage, even if it with the same lender your current mortgage is through. This new mortgage will have its own mortgage rate and terms, and will include a new approval process, closing costs, and the rest of the things you did to get your current mortgage.

In a cash-out refinance, the borrower can access some of their home equity. The new mortgage will be for an amount that is larger than the balance of their current mortgage, and the difference will be paid to the borrower in cash.

For example, if you bought a $500,000 home and you currently owe $400,000 on it, you have $100,000 in equity. Getting a new mortgage for $450,000 would allow you to "pay off" the current $400,000 balance and pocket the "extra" $50,000. In most cases, a borrower can cash out up to 80% of the equity in the home, so in this example, you would probably be able to borrow as much as $480,000 to cash out $80,000.

Related: How to Avoid Commercial Real Estate Pitfalls

How do I know if refinancing makes sense for me?

As mortgage rates rose in 2022, many homeowners wondered if the benefits of refinancing would still make sense if they need to raise their interest rate in order to access them. Simply put, there are a few people who will still benefit from refinancing with the mortgage rates we expect to see in 2023.

If you did not buy your home or refinance during the period of time when mortgage rates were historically low these past two years, refinancing may still bring you a lower or comparable rate. Accessing the equity in your home may even be worth accepting a higher interest rate, which you could always plan to lower by refinancing again when the Federal Funds Rate shifts in your favor.

What does it take to qualify for a cash-out refinance?

To be approved for a cash-out refinance, you will need to have similar qualifications as you did for your current mortgage. In addition to having enough equity in the home to make a cash-out refinance make sense, underwriters will look at your credit score, debt-to-income ratio, employment history and income or bank statements, and cash reserves to cover closing costs. In many cases, your closing costs for refinancing can be borrowed and rolled into the loan, as well.

Are there any alternatives to a cash-out refinance that might be a better fit?

There are multiple types of refinancing that might be the right fit for you. Depending on your goals, you may decide that a home equity loan (HEL) or home equity line of credit (HELOC) is better for your unique scenario. We are always happy to help walk you through your options and help you decide what type of refinancing will best support your goals.

How can the cash from my refinance be used?

When you take cash out from your home equity in a refinance, you can use it just as you would cash. In other words, you may use the cash in any way you choose. Keep in mind that financial experts tend to agree that the best use of this cash is investing in something that will have a somewhat predictable ROI, like home improvement projects that will increase your home's appraised value. Some borrowers also use this cash to leverage other plans that they expect will pay off in the future, like starting a business or funding graduate school.

Want to learn more about whether you might qualify to refinance this year? My Lender Jackie offers all loans for California and specializes in home loans and mortgages without tax returns. She loves helping the self-employed with mortgages and home loans.