Cash Out Refinance

Cash out refinance: How it works

• To qualify for a cash out refinance, you typically need a certain amount of equity in your home. The required amount will vary by lender. For example, Discover® Home Loans offers cash out refinancing up to a 90% combined loan-to-value (CLTV) ratio. For more information about CLTV, check out this resource: Loan-to-value & equity: What do you need to refinance?
• When you apply for a cash out refinance, you go through the process of a mortgage application. This includes providing documentation about your income, credit history, and other personal financial information to your lender.
• If your application is approved and there are no issues during processing, you’ll close on a new mortgage loan with a higher amount than your old one and potentially a new interest rate and term length.

When is a cash out refinance a good option?

There are a few key instances when a cash out refinance can assist homeowners, including:

Major expenses

While you are free to use the cash from a refinance in just about any way you want, it may be a good idea when you need to access your home’s equity to pay for large expenses such as home renovations, college tuition, medical bills, or elder care.

Lower interest rates

If interest rates have dropped at least 1% Annual Percentage Rate (APR) since the time you’ve taken out your original mortgage, you may qualify for a lower monthly payment through a cash out refinance.

Consolidating debt

Another reason to consider a cash out refinance is to consolidate high-interest debt into a single, lower-interest mortgage payment. This can help you save money on interest and pay off debt from sources like credit cards or personal loans more quickly. In this situation, your new lender will most likely pay any of your previous lenders directly at the time of your loan closing.

Cash for investing or saving

A cash out refinance may also be a good idea if you want to invest in a second home or other assets such as rental properties or stocks. By accessing the equity in your home, you can free up cash to make these investments.

Converting your 30-year mortgage

Lastly, a cash out refinance may be helpful if you want to convert your 30-year mortgage into a 15-year mortgage with the plan of reducing the overall amount you owe on your home loan.

Use a cash out refinance calculator to estimate your available loan amount >>

Pros of a cash out refinance

When looking at a cash out refinance, consider important benefits, such as:

Access to funds

A cash out refinance allows you to convert the increased equity in your home into cash for home renovations, debt consolidation, or investment opportunities.

Lower monthly payment

If you originally obtained your mortgage when interest rates were high, refinancing at a lower rate could save you money in the long run.

Streamlined finances

Consolidating high-interest debts like credit cards or personal loans into a single mortgage payment may simplify your financial life.

Chance to build credit

Simplifying and lowering your monthly payments through a cash out refinance may give you an opportunity to pay off debts and build your credit by establishing a positive repayment history.

Potential tax deductions

The interest paid on mortgage loans may be tax deductible. If you’re considering a cash out refinance, consult with a tax professional to understand the specific tax implications for your situation.