If you’re looking to borrow money and you have equity in your home, a cash-out refinance may be a good borrowing option for you. When you use a cash-out refinance, you take out a new mortgage for more than your current loan. You get to keep the difference, which you can use for virtually any purpose.
Before you choose this lending option, it’s important to understand how cash-out refinances work, what the advantages and disadvantages are, and what some of the best cash-out refinance lenders are.
Cash-out refinance vs. HELOC
If you’re considering borrowing against the equity in your home, you may be looking into other options, like a home equity line of credit (HELOC). Both can be good choices, but the one that’s right for you depends on a variety of factors.
Cash-out refinance
A cash-out refinance pays off your current mortgage and replaces it with a new loan with different terms. You receive the funds as a lump sum that you repay in monthly installments. Your loan may have either a fixed rate or an adjustable rate. You can generally borrow up to 80% of your home’s value, but this can vary by lender.
A cash-out refinance may be appealing because this can give you access to funds for a large purchase, and you may be able to score a smaller interest rate. If you use the funds from a cash-out refinance to make home improvements, you may even be able to qualify for a tax break. You can also do a cash-out refinance on a paid-off home, which allows you to borrow money when you no longer have a mortgage.
While a cash-out refinance has benefits, it also has drawbacks.
“This option alleviates the need to liquidate the property to access the equity,” said Tim Melia, principal and financial planner at Embolden Financial Planning LLC. “The downsides are the potential for a higher interest rate with the new mortgage, and because cash is being extracted, the amount of the principal will increase. Therefore, payments are going to be higher. Taking equity out of real estate increases the potential for fees, default, and loss of the property if the mortgage is not paid.”
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HELOC
HELOCs also make it possible to take advantage of the equity you’ve built in your home — but instead of receiving a lump sum of cash, you’re given access to a line of credit. You can borrow money when you need it (up to a limit) during the draw period, and you only pay interest on the amount of money you borrow.
With a HELOC, there may be an annual fee to keep the line of credit open. It’s also essential to consider the interest rates.
“The interest rates may be higher than a longer-term mortgage,” said Melia. “The payback is also likely going to be quicker than a cash-out refinance that may spread the repayment over a longer period.”
Which is right for you?
When it comes to which option is the “better” choice, Melia said that this depends on the borrower.
“A cash-out refinance for a known purchase need may be attractive based on available interest rates,” Melia said. “If you like the idea of having a line of credit, perhaps for use in case of emergency, a HELOC might make more sense.”
No matter which type of lending product you decide to apply for, it helps to get your credit in good shape first. Having a higher credit score will help you qualify for the best rates. Along with saving you money, lower rates can help you pay off your loan faster.
Keep in mind: With either borrowing option, it’s important to remember that failing to make payments can have serious consequences. Not only can missing payments damage your credit score, but defaulting on your loan can lead to foreclosure since your home acts as collateral. It can be helpful to set up automatic payments or calendar reminders to ensure that you never miss a payment.
Best cash-out refinance lenders
If you’re looking for a cash-out refinance loan, you have many options. The following two cash-out refinance lenders are Credible partners:
- Allied Mortgage Group: This lender offers both cash-out refinance and rate-and-term refinance options, and it states that it can close some mortgages in as little as 15 days.
- NBKC Bank: Based in Kansas City, Mo., NBKC Bank allows you to easily view mortgage rates on its website, and it offers customer service via phone, email, and online chat. The lender also has a few local branches you can visit if you live in Kansas or Missouri, making it a great choice if you prefer a more personalized experience.
Other lenders to consider
The following eight lenders are not Credible partners, so you won’t be able to easily compare your rates with them on the Credible platform. But they may also be worth considering if you’re looking for a cash-out refinance.
- Rocket Mortgage: This lender is best for borrowers who would prefer to roll closing costs into their new loan.
- Caliber Home Loans: If you prefer a more personalized experience, Caliber Home Loans may be right for you. The lender has many branch locations where you can speak with a local loan consultant.
- PenFed Credit Union: If you’d rather work with a credit union, PenFed is a great option. While you have to be a member to get a loan, all you need to do is open an account with a minimum of $5 to join the credit union.
- SoFi: If you’re a member of SoFi, you may be able to save up to $500 on loan processing fees.
- Guaranteed Rate: If you value transparency, Guaranteed Rate may be a solid option. The lender publishes its mortgage rates on its website.
- Veterans United: This is the best option if you’re interested in a lender that specializes in Veterans Affairs (VA) cash-out refinances.
- Bank of America: If you’re interested in looking at options beyond a cash-out refinance, Bank of America offers a wide variety of refinance loans. The lender also has branches nationwide.
- LoanDepot: Because LoanDepot is a direct lender, it can provide competitive refinance rates and a fast refinancing process.
Credit score: 620 (FHA, conventional), 680 (jumbo) Down payment: 3% (conventional), 3.5% (FHA), 10% (jumbo) | |
Credit score: 620 Down payment: Contact lender | |
Credit score: Contact lender Down payment: 3% (conventional), 3.5% (FHA), 0% (VA), contact lender for jumbo requirements | |
Credit score: Contact lender Down payment: 5% to 20% (conventional), 3.5% (FHA), 20% (jumbo), 0% (VA), 3% (Chase DreaMaker) | |
Credit score: Contact lender Down payment: 3% (conventional), 3.5% (FHA), 0% (USDA, VA) | |
Credit score: Contact lender Down payment: 3% (conventional), FHA (3.5%), 0% (USDA, VA) | |
Credit score: 640 Down payment: 0% | |
Credit score: N/A Down payment: 5% (conventional), 0% (VA), 0 to 10% (ARMs) | |
Credit score: Contact lender Down payment: 5% | |
Credit score: Contact lender Down payment: 3% |
Methodology
Credible evaluated loan and lender data points in seven categories to identify the "best companies" for a mortgage refinance. These categories included interest rates, fees, availability of repayment terms and discounts, eligibility requirements, minimum down payment, and the level of customer service provided. Because every lender has its own system for evaluating borrowers, the best loan or lender will depend on an individual's unique circumstance, the loan features that are most important to them, and the interest rate and terms they qualify for.
FAQ
How is a cash-out refinance different from a HELOC?
The main difference between how cash-out refinances and HELOCs work is how they distribute funds. A cash-out refinance provides a lump sum of cash, while a HELOC is a revolving line of credit. Both of these borrowing options involve tapping the equity in your home. In addition, a cash-out refinance replaces your existing mortgage, while a HELOC is a form of a second mortgage.
Is a HELOC or cash-out refinance the better option?
Generally, a cash-out refinance is the better option if you want to fund a large one-time purchase since the loan gives you access to a lump sum of cash upfront. Meanwhile, a HELOC allows you to continue to borrow money over time, so it may be better if you aren’t sure how much money you’ll need.
What happens if you don’t repay a cash-out refinance?
It’s vital that you repay a cash-out refinance loan on time, as your home acts as collateral for this type of loan. If you default on your loan payments, you risk foreclosure. Before you apply for a cash-out refinance, review your budget to see exactly how much money you can afford to spend on loan payments. If you can, cut back on other areas of spending so you can ensure you have some extra wiggle room in your budget.
Josh Patoka has contributed to the reporting of this article.
