Have you ever found yourself a little deeper in debt than you had planned? Over-extended on your line of credit? Did some recent, unexpected bills pop up and knock you for a financial loop?

These problems are more common than any of us want to admit. But what if there was a way you could remedy those situations? With a cash-out refinance loan* you can turn your home equity into cash and get your budget back on track.

What is a cash-out refinance?

In simple terms, a cash-out refinance is a lending option available when your home is worth more than what you owe on your mortgage. Unlike a second mortgage, you are not adding another monthly payment, rather, you are trading your old mortgage for a new, larger loan and you get back the difference between the two in cash. So, if your home’s value has increased in the past few years, now may be a great opportunity to get a mortgage checkup and see if you could benefit from a cash-out refi.

When a borrower gets a cash-out refinance, they get a new mortgage for an amount over what they owe on their current mortgage. How much a borrower gets back in a cash-out refinance depends on the amount of home equity they have, or what the house is worth compared to how much is owed on the current mortgage.

Get an idea of what your cash-out refi could be with this free refinance calculator.

How does a cash-out refinance work?

Like any other mortgage loan, a borrower needs to meet certain criteria set by their lender to qualify for a cash-out refinance. Lenders set a home equity minimum, creating a baseline for home market value they will accept during the cash-out refi application process.

Along with the home equity minimum, a lender will evaluate the borrower’s debt-to-income ratio (DTI) to determine if the borrower can afford the new monthly mortgage amount. Then, the lender verifies the borrower’s cash-out refi eligibility by assessing their loan-to-value ratio.

Here’s a scenario to give you a hypothetical glimpse at how a cash-out refinance can work.

Several years ago, John secured a home loan for $200,000 on a $300,000 house. Now, after making regular loan payments, John still owes $100,000 on the mortgage. But here’s the even better news, thanks to real estate home value increases, his home is now worth $350,000.

Through the combination of paying down his mortgage and his home increasing in value, he has built up $250,000 in home equity which he would like to tap into. If John gets a $150,000 cash-out refinance, John replaces his current mortgage with a new $250,000 one and receives $150,000 back in cash to use however he wants.

Does a cash-out refinance change your interest rate?

Whether or not a cash-out refinance changes your interest rate depends on the market rate when you close your refinance. For instance, if the market rate is higher than your original rate, your interest rate may increase on your cash-out refinance. However, if market rates are lower than your original rate, when you get your cash-out refinance your interest rate may also become lower.

Can you refinance a home equity loan?

If you’ve taken out a home equity loan in the past, it’s natural to wonder if you can refinance it. Yes, in most cases you can refinance a home equity loan. Start by having a conversation with your PrimeLending home loan expert to understand all of your refinancing and mortgage options.

Is a cash-out refinance a good idea?

Deciding if a cash-out refinance is a good idea is entirely up to you. Since you can use the lump sum payout any way you choose, getting a cash-out refinance can be a good idea if it works for your budget and financial goals.

Pros and cons of cash-out refinancing

When you make any decision, there are bound to be pros and cons; the same can be said for a cash-out refinance. But knowing and weighing the pros vs the cons of a cash-out refinance can help you make a more educated decision.

One of the main pros of a cash-out refinance is that you can access a large sum by tapping into your home’s equity. You can use this money any way you wish, including:

  • Paying for education or tuition costs
  • Covering medical bills
  • Renovating your home
  • Going on a vacation
  • Consolidating debt and other loans

Other cash-out refinance pros may include refinancing to create a predictable payment plan, refinancing to a lower interest rate or more favorable terms, and potentially improving your credit score.

However, there may be a couple of cons associated with your cash-out refinance. Since you will have to have another credit check and appraisal, you will have to pay closing costs again just like with your original mortgage Another con of getting a cash-out refinance is that you are prolonging your debt. A cash-out refinance can extend the amount of time you will spend repaying your mortgage.

Connect with your PrimeLending loan officer to learn how a cash-out refinance could help you.