Mortgage Products

What is a cash out refinance?

Couple considering a cash out refinance

If you have a significant amount of equity built up in your home and would like to convert that equity into money you can use, a cash out refinance may make sense for you. Here are some of the key things you should know about a cash out refinance.

What is a cash out refinance?

A cash out refinance is when you take out a new home loan for more money than what you owe on your current loan and receive the difference in cash. For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 in equity. With cash out refinancing, you could receive a portion of this equity in cash. If you wanted to take out $40,000 in cash, this amount would be added to the principal of your new home loan. In this example, the principal on your new mortgage after the cash out refinance would be $240,000.

When is a cash out refinance a good option?

A cash out refinance may make sense in a few situations:

  • When you can use the equity in your home to consolidate other debt and reduce your total interest payments each month
  • When you are unable to get other financing for a large purchase or investment
  • When the cost of other financing is more expensive than the rate you can get on a cash-out refinancing

What can I use the cash for?

You are free to use the cash in just about any way you want. Many people use it to pay down high-interest credit card debt. Even though you’ll still owe the same amount of total debt when all is said and done, you can save a lot in monthly interest payments. In this situation, your new lender will most likely pay any of your previous lenders directly at the time of your closing.

Alternatively, some people use the cash for a major purchase or expense if financing is not available or is more expensive than the rate on a mortgage. In this situation, your lender may give you your cash directly to use at your discretion.

Other common reasons for cash out refinancing include:

  • Home improvement projects
  • Education expenses
  • Purchasing an investment property
  • Paying for emergency expenses
  • Vacations
  • Elder care

Be cautious about using cash-out refinancing or other long-term financing to pay for current or short-term expenses. For example, if you use a cash out refinance to pay for a car that you’ll keep for six years, the interest rate will often be much lower than the rate on a new car loan, but you could be paying back the loan for another 24 years. If you use a cash out refinance to pay back credit card debt, you’ll have more credit available on the card, but remember that you still owe the same total amount plus anything else you would need to finance your closing costs.

Use the cash out refinance calculator from Discover® Home Loans to see how much equity you can take out of your home and estimate how much you might be able to reduce your payments by consolidating your existing debt.

What are alternatives to a cash-out refinance?

If a cash-out refinance doesn’t work for your home’s equity, there are other options to borrow. Use the loan amount calculator from Discover Home Loans to estimate how much you might be eligible for.

Home equity loan

Another option for accessing the equity you’ve built in your home is to take out a home equity loan. While a cash-out refinance replaces your current mortgage with new terms, a home equity loan can be an additional fixed rate loan.

Usually, a traditional cash-out refinance has closing costs that can amount to hundreds or even thousands of dollars. However, you may be able to avoid these costs with a home equity loan. Discover Home Loans offers a traditional home equity loan with zero application fees, zero origination fees, and zero costs at closing.

Home equity line of credit (HELOC)

Similar to a home equity loan, a home equity line of credit or HELOC more closely resembles revolving debt like a credit card.

Unlike a home equity loan that provides you with a lump sum when you are approved, a HELOC extends a line of credit from which you can withdraw funds as you need them. Any interest in the HELOC is based on the amount you withdraw, which can make it an attractive option for flexible withdrawals. Unlike a home equity loan, HELOCs typically use variable rates, which can fluctuate based on national economic factors. This can make your monthly payments change from month to month, which might make it more challenging to build a budget.

Personal loans

Personal loans use your credit rating to earn an unsecured loan. Given the security of home equity loans, most unsecured personal loans will have higher interest rates and lower borrowing limits.

Did you know?

The home equity you’ve earned
can be used in a multitude of


Start your application online

or give us a call.

  • Weekdays 8am–Midnight ET
  • Weekends 10am–6pm ET

Start your application online or give us a call.

  • Weekdays 8am–Midnight ET
  • Weekends 10am–6pm ET