Cash-out refinance: What to know before you do it
A cash-out refinance is when you refinance your mortgage for more than you owe and take the difference in cash. It’s called a “cash-out refi” for short.
You usually need at least 20% equity in your home to qualify for a cash-out refinance. And, you may be able to borrow up to 85% of your home’s value, depending on your lender.
With a cash-out refinance, you’ll receive a new mortgage for more than you owe on your home. The difference will go to you in cash. You can use that cash for anything you want, such as home improvements, consolidating debt or investing in other property.
Before you do a cash-out refinance, there are a few things to consider. Here are four things to know about cash-out refinances.
1. You could lose your home if you can’t make the payments
A cash-out refinance is a new mortgage. And, with any new mortgage comes risk. If you can’t make the payments on your cash-out refinance, you could lose your home.
Before you do a cash-out refinance, make sure you can afford the payments. Be sure to factor in the additional costs of a cash-out refinance, such as closing costs, before you commit.
2. You’ll need equity in your home
To do a cash-out refinance, you’ll need equity in your home. Equity is the portion of your home’s value that you own. For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in equity.
Most lenders require at least 20% equity in your home to qualify for a cash-out refinance. But, depending on your lender, you may be able to qualify with as little as 10% equity.
3. You may have to pay private mortgage insurance (PMI)
If you have less than 20% equity in your home, you may have to pay private mortgage insurance (PMI). PMI is insurance that protects the lender if you can’t make your payments and they have to foreclose on your home.
The cost of PMI varies, but it can add hundreds of dollars to your monthly payments. And, it can stay on your loan for years. In some cases, you may be able to get rid of PMI once you’ve built up enough equity in your home.
4. There are other options if you need cash
If you need cash, there are other options besides a cash-out refinance. You could take out a home equity loan or home equity line of credit (HELOC). These loans are secured by your home and usually have lower interest rates than unsecured loans.
You could also consider a personal loan. Personal loans are unsecured loans and don’t require collateral. But, they usually have higher interest rates than secured loans.
Before you do a cash-out refinance, consider all your options. Be sure to compare interest rates, fees and terms before you decide which loan is right for you.