‍Cash-out Refinance

Cash-out refinancing means taking out a new mortgage for more than what you owe on your house.

In a traditional refinance, you borrow just enough to pay off your existing mortgage, usually to get a better rate or different loan terms. But in a cash-out refinance, you borrow more than you need to pay off the old mortgage, and you can use the extra cash however you like.

For example, imagine you bought a home for $250,000, and it’s now worth $275,000. After your down payment and the mortgage payments you’ve made, you still owe $150,000. You could borrow 80 to 95% of the current value of your home—$220,000 to $261,000—to pay off the existing mortgage and pocket the remaining $70,000 to $81,000.

If the interest rate is lower, your house payments could go down, although your payoff date would get pushed back. As you can see, a cash-out refinance could put a lot of low-interest cash in your hands without changing your cash flow much.

Advantages of a cash-out refinance

A cash-out refinance is considered a primary mortgage, because you’ll be paying off your original mortgage with the proceeds. That gives this form of loan some substantial advantages, mostly because a primary mortgage poses less risk to lenders.

• You'll still only have one payment to make.
• The interest rates are lower than HELOC rates.
• If current interest rates are lower than what you’re paying, your house payment could go down.
• Cash-out refinances are easier to qualify for than HELOCs.
• You'll know exactly what your payment amounts, term, and schedule are.

Disadvantages of a cash-out refinance

• Your original mortgage may charge you a prepayment penalty.
• The amount you’ll receive when you sell is reduced
• If your home drops in value, you could owe more than it’s worth.
• High costs make this a poor choice if you only need a small loan.
• If you decide to borrow again, you’ll need to repeat the process.
• Closing costs can be 3-6% of the total loan amount.
• You’ll be starting your amortization schedule over, so most of your payments will go to interest for a few years again.

When to choose cash-out refinance

This type of financing is a good choice when you want to access a large amount of cash all at once—for instance, debt consolidation, major home improvements, or college education.

If current interest rates are lower than the rate on your original mortgage, a cash-out refinance could offer significant savings on your existing mortgage, plus the opportunity to borrow extra cash at a low rate.

A cash-out refinance only makes sense if you have quite a bit of equity in your home, either because you’ve been paying the principal down for several years or because your home has increased in value. You’ll need to be able to cover your existing mortgage plus the closing costs of the loan before you access any additional cash.

It’s vital that you be able to repay the loan—otherwise you risk losing your home. You should have a comfortable cash flow and a home that’s likely to hold its value well into the future to consider taking on new debt.

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A cash-out refinance can put a lot of low-interest cash in your hands without changing your cash flow much.

Home equity line of credit (HELOC)

A home equity line of credit also lets you tap into your equity. Your loan amount will be based on the appraised value of your home, much like a cash-out refinance. However, the mechanics of the loan are very different.

Instead of taking out a new mortgage and paying off the old one, you’ll keep your old mortgage and take out the HELOC as a second loan. Your HELOC will be guaranteed by the portion of your home’s value that isn’t owed to your mortgage lender.

A HELOC is a line of credit much like a credit card, so you can dip into that credit any time you need to and pay back only the amount you borrow. You might take out $10,000 for a kitchen remodel, make payments on that for a while, then draw out another $20,000 to buy a vehicle three years later.

HELOCs typically have adjustable rates based on an index, (like the prime rate) plus a markup amount based on your personal credit factors. The interest rate should have a periodic cap, which is the maximum amount it can change in one period, and a lifetime cap, or the maximum amount it can change over the life of the loan.

The draw period of a HELOC is the length of time that you can continue to dip into it for funds. A typical draw period is ten years.

The repayment period is the time frame for paying back the loan. Repayment periods typically range from 15 to 20 years.

Since a HELOC doesn’t replace your original mortgage, you’ll continue making your house payment as usual, and you’ll make separate payments on the HELOC based on what you’ve actually drawn out.

Advantages of a home equity line of credit

• Interest is lower than credit cards or personal loans.
• You pay interest only on what you’ve chosen to borrow.
• Virtually no closing costs.
• Make low, interest-only payments during the draw period.
• You won't need to repeat the borrowing process if you want to take out more in the future.
• The variable rate goes down when interest rates fall.
• No mortgage payoff means no prepayment penalty.

Disadvantages of a home equity line of credit

• You'll have two payments every month.
• Rate is higher than a cash-out refinance.
• It’s slightly harder to qualify since it's a second mortgage instead of a primary one.
• Payment amounts, rates, and terms can fluctuate.
• If your home drops in value, you could owe more than it’s worth.
• High costs make this a poor choice if you only need a small loan.
• The variable rate can go up when interest rates rise.

When to choose a HELOC

This type of financing is the right choice if you need additional funds over the next few years, but you don’t need it all at once or aren’t sure how much you’ll need.

For instance, if your kids are entering their college years, you may not be sure which school they’re choosing or what scholarships are available to them. A HELOC gives you the peace of mind of knowing you have plenty of cash available without having to borrow more than you need. Like a cash-out refinance, a HELOC requires substantial equity in your home to be worth the time and expense.

Pledging your family’s home as security for a loan is a serious commitment. Only take out a HELOC when you’re in a strong position to repay the loan. You’ll need a reliable income, manageable expenses, and a home that will hold its value.

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A home equity line of credit works like a credit card, with a limit, a balance, and a monthly payment.

Tips for borrowers

• Be clear about your financial goal. Do you want the maximum loan available, or the lowest payment? Are you trying to improve your cash flow or leverage investments? Keep your goal in mind as you navigate the loan process.
• Think long-term. Consider future financial events such as childbirth, college expenses, or retirement. You don’t want to pay closing costs again in just a few years.
• Decide on a monthly payment you can comfortably afford, and don’t be tempted to commit to anything above that amount.
• Remember that mortgage interest is only deductible when the loan is used to buy or improve your home (and only if you itemize).
• These loans are ideal for long-term investments like home improvements, a college degree, or funding your business. These should not be used to fund expenses like vacations or weddings.
• Shop around for the best rates. Your bank might not offer the best deal.
• Be sure to visit Lower.com for the lowest interest rates and monthly payments.
• Be sure to compare APR numbers, which calculate the rate plus the costs of the loan—especially for a cash-out refinance, which can have high closing costs.
• HELOCs have variable rates and may have an initial discount period. Be sure to ask when that expires.
• Look for flexible terms. For instance, some HELOCs can be refinanced into a fixed rate in the future.
• Check your credit report before you apply, and correct any errors or omissions you find there.
• Pay down any high-balance credit cards at least a month before you apply to boost your credit rating so you’ll be offered a better rate.
• Get your paperwork in order early. You’ll need the same kind of documents you needed for your original mortgage: W-2s, paycheck stubs, tax forms, and bank statements.
• Ask potential lenders how much of your home’s equity you can borrow. Most only offer 80%, but Lower.com will unlock up to 95% of your home’s value for you.
• Pay attention to the service you receive while you’re shopping for rates and asking questions. You want to work with a business that will respond quickly and politely if you have a problem.
• Take a look at any extras that are being offered. For instance, Lower.com is currently offering free refinancing for life. If you choose to refinance again in a few years, you’ll pay no lending fees at all. Lower.com also offers a simple loan process, quick close, and accessible customer service.

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These loans are ideal for home improvements, a college degree, or funding your business.

Choose the right solution for you

Cash-out refinancing and home equity lines of credit offer many of the same advantages. Both have lower rates than personal loans or credit cards. Both offer the option of moving some of your home equity into long-term investments like debt consolidation, home improvements, or college expenses.

Deciding which to choose is a highly personal matter that will depend on your family’s circumstances and the financial events on your horizon.