Definition
A cash-out refinance replaces your mortgage with a larger one, giving you the difference in cash. You're borrowing against your home's equity for renovations, debt consolidation, or other purposes. The new loan resets your mortgage term, so the total interest costs more.
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Cash-out refinances allow homeowners to tap into their equity for various purposes like home improvements, debt consolidation, or large purchases. Lenders typically allow borrowing up to 80-85% of the home's current value (LTV). Interest rates on cash-out refinances are usually slightly higher than rate-and-term refinances due to increased loan-to-value ratios. The cash received is not taxable income.
Pro Tip
Cash-out refinances offer tax-deductible interest if funds are used for home improvements; keep documentation to support this use.
Example
Your home is worth $400,000 with a $200,000 mortgage remaining. You refinance for $280,000 and pocket $80,000 in cash to fund a kitchen renovation, while resetting your mortgage term.