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If you’ve built up some equity in your home, a cash-out refinance could be an option to access cash when you need it, such as to remodel your home or consolidate debt. This type of refinance pays off and replaces your existing mortgage with a larger loan, and you’ll receive the difference to use how you wish, minus any closing costs or fees.
As with other kinds of mortgages, interest rates on cash-out refinances tend to fluctuate daily. As of May 2023, the average rate for a cash-out refinance ranges between 5% and 7%, but you may be able to score a better deal by comparing options from several different lenders.
Today’s Cash-Out Refinance Rates
How To Get the Best Cash-Out Refinance Rates
Keeping an eye on national averages and advertised rates can help you get an idea of what’s happening in the mortgage market, especially if you consider how rates have fluctuated over time.
To get the best interest rate on a cash-out refinance, be sure to take the time to shop around and compare your options from as many lenders as possible. This can help you not only secure an optimal rate but also find the right lender for your needs.
There are also several factors that can influence the rates you’re offered:
- Credit score. For a conventional cash-out refinance, you’ll generally need a credit score of at least 620. With an FHA loan, you might get approved with a credit score as low as 500, while VA cash-out refinances have no set minimum—but the exact requirements for either of these options will depend on the lender you work with. To qualify for the lowest interest rates available, you’ll typically need good to excellent credit, which usually means having a credit score of at least 670.
- Debt-to-income (DTI) ratio. Your DTI ratio is the amount you owe on monthly debt payments compared to your income. To get approved for a cash-out refinance, your DTI ratio should be no higher than 50%—though some lenders might require a ratio as low as 40%.
What Is a Cash-Out Refinance?
If you opt for a cash-out refinance, you’ll take out a new, larger mortgage to replace your existing one. You’ll then receive the difference between the two loans as a lump sum (minus any closing costs or fees), which you can use to cover almost any expense. Repayment terms range up to 30 years.
Depending on your credit, you might qualify for a lower interest rate through a cash-out refinance. This could be especially helpful as you’ll be increasing the loan amount you’re paying interest on. You can use our mortgage refinance calculator to estimate what your costs with a cash-out refinance might look like.
Keep in mind, though, that cash-out refinances usually come with somewhat higher rates compared to standard rate-and-term refinances as lenders consider them to be a riskier investment. Additionally, the actual rate you receive will depend on if you choose a conventional loan or a loan backed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).
Also remember that just like with any mortgage product, your home is used as collateral for a cash-out refinance. This means you risk foreclosure if you can’t keep up with your payments.
How Does a Cash-Out Refinance Work?
A cash-out refinance lets you access the home equity you’ve built up over time. When you replace your existing loan with the new loan, you can receive up to a certain amount of your home equity as a lump sum cash payment.
Lenders typically require you to maintain at least 20% equity in your home. So, that means you can potentially borrow up to 80% of your home’s value.
Pros and Cons of Cash-Out Refinance
It’s important to understand the benefits and downsides of a cash-out refinance before choosing this option.
- You could lower the interest rate on your new mortgage compared to your existing loan.
- You can use the money for just about anything you want, including home improvements or paying off debts.
- You can put the cash towards home repairs and improvements to increase your home’s value before putting it on the market.
- It may take longer to pay off your home and your monthly payments may go up.
- If you extend your loan term, you could end up paying more mortgage interest over time.
- You’ll need to pay closing costs.
When To Do a Cash-Out Refinance
Consider a cash-out refinance when you can qualify for a lower interest rate than your existing loan, tap equity to refinance high-interest debt or restructure your repayment term for an affordable monthly payment. However, you may pay more interest overall if you refinance for a longer period.
Consider taking these steps before applying for a better rate and loan terms:
- Improve your credit score. A higher score makes it easy to qualify for a better rate. Borrowers with good or excellent credit are likely to receive lower interest rates. Take time to repay existing debt or fix any credit report errors to improve your score.
- Reduce your debt-to-income (DTI) ratio. Paying off outstanding debt or increasing your income reduces your DTI. Lenders require a DTI below 50%, but being below 40% improves your chances of landing favorable terms.
- Boost your cash reserves. Lenders may require borrowers with a high DTI ratio to have at least six months of cash reserves for mortgage payments.
How Much Can I Get From a Cash-Out Refinance?
With conventional and FHA loans, mortgage lenders will typically allow you to draw up to a maximum of 80% of your home’s equity through a cash-out refinance—meaning you must maintain at least 20% equity in your home. An exception to this is a VA cash-out refinance, which allows borrowers to access up to 100% of their home’s equity.
For example, say your home is worth $500,000, and you owe $300,000 on an existing conventional mortgage. To calculate your home’s equity, you’ll subtract the amount you owe in loans secured by your house from its appraised value—so subtract $300,000 from $500,000, which leaves $200,000 in equity.
If the lender allows you to access 80% of this amount, you’ll be able to access up to $160,000 with a cash-out refinance ($200,000 x 0.80 = $160,000). This will leave the required 20% equity in your home.
Keep in mind that to calculate exactly what you’re allowed to borrow, the lender will typically require an appraisal by a trusted third party to determine the home’s value. While the lender orders the appraisal, you as the borrower will have to pay for it as part of your closing costs. You can generally expect an appraisal to cost $300 to $400 for a single-family home while multi-family units can cost up to $600 or more.
Closing Costs for a Cash-Out Refinance
Closing costs for a cash-out refinance differ by lender, location and loan amount but usually range between 2% and 6% of the total loan amount.
The biggest closing cost is the origination fee charged by the lender—typically around 1% of the mortgage. Other closing costs may include an appraisal fee, credit check, mortgage insurance, title services, notary fees and recording fees.
How Do I Apply for a Cash-out Refinance?
The application process for a cash-out refinance is very similar to getting your first mortgage. If you’re ready to apply, follow these steps:
- Check your credit. When you apply for a cash-out refinance, the lender will look at your credit to determine if you qualify—so it’s a good idea to check your credit beforehand to see where you stand. You can use a site like AnnualCreditReport.com to review your credit reports for free. If you find any errors, dispute them with the appropriate credit bureau to potentially boost your credit score.
- Consider other requirements. In addition to your credit, the lender will also look at your income and DTI ratio. You’ll also typically need at least 20% equity in your home and a loan-to-value (LTV) ratio no higher than 80%, though some lenders might go higher. Your LTV ratio compares the worth of your home to what you owe on your mortgage and is used by lenders to decide the risk of an investment. You can calculate this by dividing your mortgage balance by the appraised value of your home.
- Compare lenders and pick an option. Be sure to shop around and compare your options from as many mortgage lenders as you can—including your current lender—to find the right loan for your needs. Consider not only interest rates but also repayment terms, any fees charged by the lender and equity requirements. After you’ve shopped around, choose the lender that works best for you.
- Complete the application. Once you’ve picked a lender, you’ll need to fill out a full application and submit any required documentation, such as tax returns and bank statements.
- Get your funds. If you’re approved, you can expect the entire closing process to take anywhere from 45 to 60 days. To prevent any delays, be sure to fill out the application as accurately as possible and provide requested documentation quickly. Afterward, you’ll get a lump-sum payment to use how you’d like.
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Why Use a Cash-Out Refinance Instead of a HELOC or Home Equity Loan?
In addition to cash-out refinancing, other ways to tap into your home equity include a home equity line of credit (HELOC) or a home equity loan. There are several differences between these types of loans, so whether a cash-out refinance will be better for you than either of these options will depend on your individual situation and financial goals.
To help you decide, here’s how HELOCs and home equity loans compare to cash-out refinancing.
- HELOC. A HELOC is a type of revolving credit that allows you to repeatedly draw on for a certain period of time and then you pay off your credit line. HELOCs generally come with variable rates that can fluctuate with the market, and these rates are usually higher than what you’d get with a cash-out refinance. Also, unlike a cash-out refinance, a HELOC is technically considered a second mortgage, meaning you’ll have to manage payments for both the HELOC and your first mortgage.
- Home equity loan. Unlike a HELOC, a home equity loan is paid out as a lump sum to use how you’d like. Rates on home equity loans are fixed, which means they’ll stay the same throughout the life of the loan. Home equity loan rates will usually be higher than what you’d pay on a cash-out refinance. Home equity loans are also considered to be second mortgages.
If you’re only looking to borrow a small amount, a HELOC or home equity loan might be a better option than a cash-out refinance. But if you want to take advantage of a better interest rate and would prefer to have just one loan to manage, then a cash-out refinance could be the better choice.
Also keep in mind that closing costs for a cash-out refinance tend to be higher than they’d be for a HELOC or home equity loan. This is because a cash-out refinance is essentially a brand-new mortgage, making it costlier to process. Closing costs for a cash-out refinance are typically 3% to 5% of your loan amount while for a home equity loan, these costs can range from 2% to 5%.
Is a Cash-Out Refinance Worth It?
A cash-out refinance is worth it if you want to consolidate high-interest debt, complete home improvements or cover other essential expenses at an interest rate lower than unsecured loans. Also, your repayment period can be longer than a home equity loan, which minimizes your minimum monthly payment.
However, you must be comfortable replacing the rate and repayment term for your existing loan, as cash-out refinance rates tend to be higher than a rate-and-term refinance. Additionally, you will pay closing costs similar to a purchase loan, which can reduce your interest savings.
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Frequently Asked Questions (FAQs)
How long does a cash-out refinance take?
Successfully completing a cash-out refinance involves many of the same steps you took to get your original mortgage. It can take 30 to 45 days to complete the underwriting process with most traditional lenders, but it’s not uncommon for refinances to take up to 60 days to close. If you decide to use an online lender, it might be slightly faster.
What is a limited cash-out refinance?
A limited cash-out refinance only allows you to borrow a certain amount of equity. Your lender may set a cap equal to the sum of the unpaid principal balance of your existing mortgage, closing costs, mortgage points and other funds, limiting the amount you can receive as cash.
For instance, a Fannie Mae-owned mortgage gives you the option to receive $2,000 or 2% of the principal amount of the new mortgage—whichever is less— in cash when you opt for a limited cash-out refinance.
How long before I can do a cash-out refinance?
You must have owned the property for at least six months prior to the disbursement date of the new loan. This is known as the seasoning requirement.
There are some exceptions to this rule. For example, if you acquired the property through an inheritance or a divorce, you won’t need to meet the six-month seasoning requirement.
How do you qualify for a cash-out refinance?
To qualify for a cash-out refinance, you’ll need a credit score of at least 620 (although it can be as low as 500 for an FHA loan), a DTI ratio no higher than 50% and at least 20% equity in your home.
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Because cash-out refinances are a riskier proposition, they tend to have higher interest rates compared to a no-cash-out refinance. Still, there are steps you can take to receive a more competitive rate, including improving your credit, keeping your LTV ratio low and buying points.What is the current cash-out refinance rate? ›
|Star One Credit Union 5/1 ARM refinance Points: 0||6.250% 5/1 ARM refinance||7.915%|
|Schools First FCU 30 year fixed refinance Points: 0||7.375% 30 year fixed refinance||7.391%|
|Star One Credit Union 30 year fixed refinance Points: 0||7.125% 30 year fixed refinance||7.127%|
Because cash-out refinances are a riskier proposition, they tend to have higher interest rates compared to a no-cash-out refinance. Still, there are steps you can take to receive a more competitive rate, including improving your credit, keeping your LTV ratio low and buying points.Who has best cash out rates? ›
|Mortgage Lender||Average 30-Year Cash-Out Refi Rate (2022)|
|JP Morgan Chase||4.27%|
|U.S. Bank National Association||4.29%|
If interest rates are lower than what you are currently paying, or if your financial situation has improved so that you could qualify for better rates and terms, then a cash-out refinance could be beneficial, says Grzebin. Lower monthly bills.Do you need an appraisal for a cash-out refinance? ›
Your lender will typically require a new home appraisal if you want to change your loan type or take a cash-out refinance. However, if you're only refinancing your loan's term, interest rate or payment structure, you can often do so without getting a new appraisal.What is the downside of a cash-out refinance? ›
Your home will serve as collateral for the cash-out refinance. If your new loan increases your monthly payment, you might have a harder time keeping up in the event your income goes down or your expenses go up. You could be at higher risk of foreclosure than if you hadn't refinanced.
Getting a Cash-Out Refinance
Typically, you can access 70-80% of your home's equity. The exception to this is the VA Refinance, which allows eligible military service members to pull 100%.
Most lenders require you to have a credit score of at least 580 to qualify for a refinance and 620 to take cash out. If your score is low, you may want to focus on improving it before you apply or explore ways to refinance with bad credit.Are cash outs worth it? ›
Cash Out allows you to settle for a loss in running or mid-event, and this can prove beneficial if you believe that your selections chances are greatly reduced once the event has started. Anyone who has ever placed a bet before is likely to have heard of the phrase 'Cash Out'.
Real estate marketplace Realtor.com anticipates rates will average 6.4% in 2023, gradually decreasing to 6.1% by the end of the year, according to a mid-year update to its National Housing & Economic Forecast.How long does a cash-out refinance take? ›
The process of getting approved for a cash out refinance tends to be faster than a HELOC or home equity loan, but how long does it actually take? If you ask a loan officer, they'll most likely say anywhere from 30 to 45 days. While this is generally true, there are plenty of instances where it can take much longer.What is the best company to use for a refinance? ›
- Truist: Best for refi loan options.
- Rocket Mortgage, LLC: Best for refi loan options.
- New American Funding: Best for rate transparency.
- CrossCountry Mortgage: Best for customer satisfaction.
- Bethpage Federal Credit Union: Best for digital convenience.
|Lender||Starting Auto Refinance APR||Industry Standing Rating|
|1. Auto Approve||5.24%||8.9|
|3. PenFed Credit Union||5.19%||9.7|
|4. Consumers Credit Union||5.54%||10.0|
The current official cash rate as determined by the Reserve Bank of Australia (RBA) is 4.10%. The next RBA Board meeting and Official Cash Rate announcement will be on the 3rd October 2023.