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When you’re a homeowner and you pay your mortgage, you build equity in your home over time as your principal balance decreases and your home goes up in market value. In some cases, you may decide to access that equity with a cash-out refinance.
A cash-out refinance allows you to take out a new, larger mortgage loan to pay off your existing mortgage and pocket the difference to use for other purposes. Because a cash-out refinance carries some risk — like losing your home to foreclosure if you can’t afford the higher mortgage payments — you need to decide if it’s worth it in the long run based on your overall financial goals.
On this page:
- What Is a Cash-Out Refinance?
- Best Cash-Out Refinance Lenders
- Benefits of a Cash-Out Refinance
- Downsides of a Cash-Out Refinance
- How Does a Cash-Out Refinance Work?
- Cash-Out Refinance Rates
- Should I Choose a Home Equity Loan Instead?
What Is a Cash-Out Refinance?
A cash-out refinance involves taking a new mortgage loan in excess of your current mortgage balance. For example, if you owe $150,000 on your mortgage, you could take out a new $200,000 mortgage, depending on your home’s value and the equity you have built up. You’d use $150,000 to pay off your existing mortgage and keep the rest.
Cash-out refinances can be used for many things, including:
- Home improvements
- Debt consolidation
- College tuition
- A down payment on a second home or home for your child
- Other major purchases
Any time you want to put access your home equity to use the funds for other things, a cash-out refinance could be the solution.
LendEDU’s 5 Best Cash-Out Refinance Lenders
Here’s a list of our five top-rated cash-out refi lenders, so you can start your search with the best. But remember—always compare quotes from a few different lenders to find the best rates.
Honest home loans. Completely online.
- Get a rate in seconds and apply in minutes
- Refinance quickly and hassle-free
- $0 lender fee
Reali offers a variety of loan options including cash-out refinance loans. It was founded in part to eliminate unnecessary fees from the mortgage process, so Reali is a great choice for borrowers looking for a low-cost cash-out refinance loan.
The entire application process can be completed online, making it simple and easy to get cash out of your home.
- Minimum credit score: 580
- Maximum LTV: 97%
- Fees: No lender fees
- LendEDU Rating: 5.00 / 5.00
- Loan estimates are available in just three minutes
- You can get a free rate lock to protect you against fluctuation in the mortgage market
- The entire application process can be completed online
- You cannot take out a home equity loan or HELOC with Reali
- Reali loans are currently only available in 12 states
- Reali builds profits into the interest rates it charges instead of charging fees. This means rates could be higher than with some competitors (but fees could be lower!)
Full Review: Reali Loans Mortgage Review
2) New American Funding
Your Mortgage, Your Terms.
- Get pre-approved in as little as 48 hours
- Complete the entire application process online
- Choose from a wide variety of mortgage options
New American Funding offers a wide variety of mortgage loans, including FHA loans and VA loans as well as cash-out refinance loans without government insurance. The mortgage lender is family-owned but is still one of the larger lenders in the country based on origination volume.
- Minimum credit score: Not provided
- Maximum LTV: 97%
- Fees: New American doesn’t disclose its fees, but most borrowers can expect to pay some form of lenders fee
- LendEDU Rating: 4.96 / 5.00
- The entire process of getting a mortgage can be done online, including completing your application, getting a customized quote, uploading your documents, and tracking loan progress
- Manual underwriting is used to determine who can qualify, which can help borrowers who don’t have a long credit history but who have been financially responsible
- The lender is family-owned and well-known for good customer service, but it still provides mortgages to most of the country
- Closings could take as long as 30 days
- You need to contact New American to obtain a pre-qualification letter that some sellers may require
- You may have to pay lenders fees up to or exceeding $1,500 on a typical mortgage
Full Review: New American Funding Mortgage Review
Refinancing Now Could Save You Thousands.
- Save money by choosing Connexus
- Low down payment options for all fixed-rate loans and most ARMs
- Down Payments as Low as 3%
Connexus is a credit union, so membership is required in order to obtain a cash-out refinance loan from this lender. Connexus allows you to apply online for your mortgage or to talk with a mortgage broker via phone or in person.
The credit union provides a wide variety of mortgage loan options, including cash-out refinance loans and construction loans. It promises rates below the national average to provide thousands in savings on interest.
- Minimum credit score: Not provided
- Maximum LTV: Not provided
- Fees: Lender fees may be applied
- LendEDU Rating: 4.72 / 5.00
- Interest rates are lower than the national average, providing significant savings
- You can complete the entire loan application process online, but you do have the option of getting in-person customer support if needed
- The general minimum credit score requirement is lower than with most other mortgage lenders
- Loans are available only to credit union members
- Loans are available only in a limited number of states
- Lender fees may be charged
No Hidden Fees, No Catch.
- Find your rate in minutes
- No hidden fees
- Exclusive member discounts
SoFi provides member benefits, including interest rate discounts, to existing customers who take advantage of their wide array of financial products. SoFi is well-known for student loans, but also provides personal loans and home mortgages including cash-out refinance loans.
You can get a home with as little as a 10% down payment, and you can find out your personalized interest rate in as little as two minutes after submitting an online application.
- Minimum credit score: Not provided
- Maximum CLTV: 90%
- Fees: Lender fees are charged, but members are eligible for a discount
- LendEDU Rating: 4.70 / 5.00
- The entire mortgage application process can be done online
- SoFi works with self-employed borrowers and others with non-traditional sources of income
- Membership comes with benefits, including interest rate discounts, $500 off your refi processing fees, and financial advisory services
- SoFi offers fewer loan options than other lenders; for example, no FHA loans or home equity lines of credit are offered
- Lender fees are charged
- SoFi requires higher credit scores for jumbo loans than some other lenders
Full Review: SoFi Mortgage Review
Home Mortgage, Refinance, and Home Equity Loans
- Fixed terms
- Affordable monthly payments
- Cash out up to 90% loan-to-value
loanDepot offers a wide variety of loan options and is one of the largest FHA and VA-approved lenders in the nation. It has more than 150 branches across the country, so getting help in person is easy.
But the lender’s online mortgage application process does require you to speak with a loan officer on the phone, so you can’t complete the entire process online.
- Minimum credit score: Not provided
- Maximum LTV: Not provided
- Fees: Lender fees may apply
- LendEDU Rating: 4.67 / 5.00
- loanDepot offers a lifetime guarantee—after you refinance with the lender once, you get lender fees and appraisal fees reimbursed on any future refinance loans
- Ample customer support. Loan Depot has more than 1,700 licensed loan officers spread across the United States to provide assistance with the borrowing process
- Easy online process. You can define your goals, pick a loan and submit documents all online
- You generally have to talk with a loan officer on the phone to start the process of applying or to get a pre-approval letter
Full Review: loanDepot Mortgage Review
How We Rate Our Lenders
We ranked and rated 16 major mortgage lenders offering cash-out refinancing based on the weighted average of eight data points:
- BBB Rating (10%)
- Trustpilot Rating (10%)
- States Available (5%)
- Lender Fees (15%)
- Application Fees (15%)
- Online Application (10%)
- Customer Support (20%)
- Zillow Rating (15%)
Benefits of a Cash-Out Refinance
There are many potential benefits of a cash-out refinance, including:
- Competitive interest rates: Since the new loan is secured by collateral (in this case, your home), you will likely receive a competitive interest rate. Mortgage loans tend to have much lower rates than credit cards, personal loans, and other consumer debt.
- Lower interest rates than home equity loans or home equity lines of credit: You could also access the equity in your home by taking a home equity loan or a home equity line of credit (HELOC). However, both loan products tend to have higher interest rates than a primary mortgage — which is what you’d have if you took out a new mortgage for a cash-out refi.
- Convenience: If you opt for a cash-out refi, you’ll have just one loan to pay, whereas if you took out a home equity loan or home equity line of credit, you’d have multiple monthly payments.
- Tax deductibility: If you itemize on your taxes, you can take a deduction for interest on mortgages up to $750,000 in value (for home loans taken out after December 2017). Although you can take a deduction for home equity loans, this is only possible if the loan was used to build, buy, or substantially improve the home guaranteeing the loan. (Using the loan to pay off high-interest debt, like credit card debt, means you won’t qualify for this tax deduction).
These advantages, particularly a low rate for well-qualified borrowers, make a cash-out refi a great way to access the equity in your home.
Get a better rate and cash in no time
- Closing in as few as 10 days
- Fast, Easy, and 100% Online Application Process
- Get your rate quote instantly without affecting your credit
- Everything can be done from the convenience of your home (including appraisal and closing.)
Downsides of a Cash-Out Refinance
Unfortunately, there are also some potential downsides associated with a cash-out refinancing loan, including:
- You put your home at risk to guarantee the loan: Since your home is securing the loan, you risk foreclosure if you become unable to repay what you borrowed.
- You risk ending up underwater: The higher your mortgage balance relative to the value of your home, the greater the risk you could end up owing more than what your house is worth, also known as being underwater on your mortgage. If you can’t sell your home at a price high enough to pay off your loan amount, you’ll have to make up the shortfall yourself or get your lender to agree to a credit-destroying short sale.
- You may have to pay private mortgage insurance: If you owe more than 80% of what your home is worth, you have to pay private mortgage insurance (PMI). PMI protects your lender in the event you default on your loan. PMI typically costs around .5% to 1% of the amount you borrow in annual premiums. On a $200,000 mortgage loan, this could mean $2,000 per year in PMI costs.
Because of these downsides, taking a cash-out refinance loan is a good idea only if you’re 100% confident you can pay back what you borrow — and, ideally, if you’re not accessing the entirety of the equity you’ve built up in your home.
How Does a Cash-Out Refinance Work?
To obtain a cash-out refinance loan, you’ll need to be able to qualify for a new mortgage for the desired amount. The new mortgage needs to be big enough to pay off your old loan and give you the money you’re looking for to accomplish your other goals, such as making home improvements or paying for college.
You can apply for the new mortgage with your current lender or with a new lender. To qualify, you’ll generally need:
- A credit score of at least 620 to qualify for most mortgages, or at least 580 to qualify for a loan backed by a government program, such as an FHA loan.
- A home that appraises for at least as much as you want to borrow, and preferably 20% more than you hope to borrow.
- Proof of sufficient income to repay your new loan. Most lenders like to see that you’ve had a steady source of income for at least two years.
- A debt-to-income ratio of 43% or less, including your new mortgage payment. Debt-to-income ratio is calculated based on your monthly debt payments (including student loans) relative to your monthly gross income. If you’ll have total debt costs of $2,000 per month after taking out a new mortgage and you have a $4,000 monthly income, you probably won’t qualify.
- A home with no tax liens on it.
You’ll need to shop around to find a lender with the best terms and then submit an application for the desired sum. After you apply:
- The lender will evaluate your credit, income, debts, and other financials.
- Your home will be appraised. The lender may also want an inspection to assess its condition and/or a survey to verify the land boundaries.
- The lender will let you know how much you can borrow and at what interest rate based on the value of your home and your financial situation.
- You’ll need to close on your mortgage loan, after which you will receive your loan proceeds. Your existing mortgage loan will be paid off from the proceeds before you’re given the remainder of the money.
There will likely be fees charged during this process, including an appraisal fee, a mortgage application fee, fees to obtain your credit report, and other miscellaneous closing costs depending on your lender and where you live.
Cash-Out Refinance Rates
The interest rate you’re assigned on a mortgage refinance loan will vary based on your Zip code, the amount you borrow relative to what your home is worth (your loan-to-value ratio), your credit score, and other factors.
Current mortgage rates for a 30-year fixed-rate loan are around 4.207% APR for qualified borrowers as of March 2019. For a 15-year fixed-rate loan, rates are around 3.661%. Rates are lower for jumbo loans, which are loans exceeding Fannie Mae and Freddie Mac loan limits for your geographic area.
Once you have an idea of the types of rates you could qualify for, you can use our cash-out refi calculator to estimate how much you could get.
Should I Choose a Home Equity Loan Instead?
A home equity loan also allows you to access the equity in your home, but these loans work differently. You don’t pay off your existing loan with a home equity loan; instead, you take out a second mortgage that’s secured by some of the equity in your home.
>> Read More: Cash-out refinance vs. home equity loan
Qualifying for a home equity loan can be harder than qualifying for a cash-out refi. There are certain other downsides, too, like the fact you may not be able to deduct the interest you pay.
Ultimately, a cash-out refinance can be a helpful financial tool, but you need to understand the risks before you take out a new mortgage to tap into your home’s equity.
If you’re confident you can pay back the loan and that the benefits outweigh the disadvantages, it’s time to shop around and find the most affordable loan for your situation.
Author: Christy Rakoczy