How much cash can you get with a refinance?

Cash-out refinancing is a popular way to use the equity in your home to borrow the funds you need. It’s also a great way to improve your existing mortgage’s interest rate and negotiate for better terms, such as decreased monthly payments or fewer interest charges over the life of the loan.

When national prime interest rates drop, home owners may find refinancing for better rates an attractive option.

How much cash you can get with a refinance depends on how much is still owed on your current mortgage, how much your house is appraised for and what loan-to-value ratio (LTV) your lender will approve (typically a loan of 80% of the value of your home).

Discover® Home Loans has a Cash-Out Refinance Calculator that gives you a quick and easy way to see how much cash may be available to you through a cash-out refinance.

How a traditional mortgage refinance works

In a traditional refinance (known as rate-and-term refinance), you pay off your current mortgage loan with a new mortgage loan that offers better rates or terms. With a traditional refinance, you’re not borrowing any additional money, although you can consolidate two mortgage payments into one mortgage.

The main reasons people refinance their mortgage is to:

• Obtain a better interest rate,
• Reduce monthly payments by extending the repayment terms,
• Reduce interest charges by shortening repayment terms, or
• Convert a variable rate to a fixed rate or vice-versa.

Discover has a Mortgage Refinance Calculator that can easily show you how much money you can save when refinancing your mortgage.

How a cash-out refinance works

A cash-out refinance achieves the same goals as a refinance: adjusting the repayment terms or interest rates of your original mortgage. Additionally, if you have sufficient equity in your home, you can borrow more cash to use for almost any purpose with the same loan.

So, a cash-out refinance does two things:

• It pays off your existing mortgage and
• It lets you borrow cash to use for almost any purpose.

For example, if you’re approved for a $300,000 cash-out refinance and you still owe $100,000 on your current mortgage—including any second mortgage and home equity loans—then $100,000 will pay off your original mortgage lender and you’ll have $200,000 in equity. Lenders generally lend up to 80% of your equity, so you will have up to $160,000 in the example provided available to borrow.

The cash you receive through the cash-out refinance can be used for almost anything. Some common reasons for cash-out refinancing include:

• Home renovations
• Tuition costs
• Emergency expenses
• Consolidating high-interest debt

Because you’re taking out cash on top of your mortgage, the total amount of your loan will increase when compared to your original mortgage loan.

LTV impacts how much you can get with a cash-out refinance

Your loan-to-value ratio (LTV) impacts how much money you can get through a cash-out refinance. LTV combines the total amount remaining on existing home loans:

• The debt remaining on your original mortgage,
• Any debt from additional home equity loans or home equity lines of credit,
• The amount you intend to borrow through your cash-out refinance.

And divides that sum by the appraised value of your home.

LTV gives lenders an idea of your ability to take on new debt through a cash-out refinance or home equity loan. Discover Home Loans allows you to use a cash-out refinance for amounts that are under 90% of your LTV.

You can use the formula below to determine how much money you’d be eligible for or use a Discover Home Loan Cash-Out Refinance Calculator to learn how much cash you can get with a cash-out refinance.

How to calculate cash out refinance

If you have two mortgages on your home (an original mortgage balance of $100,000 and a home equity loan for $50,000) and your home is worth $300,000, your combined loan-to-value ratio is 50%:

1. Combined loans: $100,000 + $50,000 = $150,000
2. Value of your home: $300,000
3. Combined loan-to-value ratio: $150,000 ÷ $300,000 = 0.50 (50%)

Discover Home Loans accepts CLTV and LTVs less than 90% of your home’s appraised value. With an appraised home value of $300,000, the maximum amount of combined loans you can withdraw from your home’s equity is $270,000:

$300,000 x 0.899 = $269,700

If you take the remaining balance you owe on your home ($150,000) and subtract that from the maximum combined loan amount ($270,000), you can see how much cash is available to you through a cash-out refinance:

$269,700 − $150,000 = $119,700

You can also use a Discover Home Loan cash-out refinance calculator, to determine whether cash out refinancing is right for you and what your mortgage rate might be after you refinance.