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 potentially 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, homeowners 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 combined loan-to-value ratio (CLTV) your lender will approve.
How a traditional mortgage refinance works
In a traditional refinance (known as a 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. If you have more than one existing mortgage on a property, you may be able to consolidate them into a single loan through refinancing.
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.
How a cash out refinance works
A cash out refinance achieves the same goals as a rate-and-term refinance – adjusting the repayment terms or interest rates of your original mortgage. The key difference is if you have sufficient equity in your home, you can use a cash out refinance to borrow more money on top of your existing mortgage to use for almost any purpose.
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 the current value of your home is $400,000 and you’re approved for a $300,000 cash out refinance with a $100,000 balance on your current mortgage, then $100,000 will pay off your original mortgage lender and you’ll have $200,000 of cash in your pocket.
The cash you receive through a 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.
How much equity you need for a cash out refinance
The amount of equity you need for a cash out refinance can vary depending on several factors, including your lender’s requirements, your creditworthiness, applicable state and/or local laws that regulate borrowing amounts, and the loan program you choose. Generally, most lenders have specific guidelines when it comes to the amount of equity required for a cash out refinance.
Your combined loan-to-value ratio (CLTV) impacts how much money you can get through a cash out refinance. Your CLTV adds up 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.
Then, that sum is divided by the appraised value of your home.
CLTV gives lenders an idea of your ability to take on new debt through a cash out refinance or home equity loan. However, it’s important to note that additional factors such as your credit score, income, debt-to-income (DTI) ratio may also play a role in determining the maximum loan amount you may qualify for.
Also, keep in mind that cashing out too much equity may increase your loan balance and monthly payments. Weigh the potential benefits of accessing the funds against the potential risks and costs associated with a cash out refinance before you make your decision.
How to calculate a 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%:
- Combined loans: $100,000 + $50,000 = $150,000
- Value of your home: $300,000
- Combined loan-to-value ratio: $150,000 ÷ $300,000 = 0.50 (50%)
Discover® Home Loans accepts CLTVs up to 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 approximately $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 ($269,700), 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 the cash out refinance calculator from Discover to determine whether cash out refinancing is right for you and what your mortgage rate might be after you refinance.
Steps to secure the best cash out refinance rates
If you’re considering a cash out refinance, one of the key factors to focus on is securing the best available interest rates. Lower rates may result in significant savings over the life of the loan — here are a few steps you can take to increase your chances of obtaining the best cash out refinance rates:
- Improve your credit score: Lenders consider your credit score as an indicator of your ability to manage your debts. A higher score may often lead to more favorable interest rates. Take steps to improve your credit score by paying bills on time and reducing your outstanding debts.
- Assess your debt-to-income ratio: Lenders also consider your debt-to-income (DTI) ratio when determining the interest rates they will offer you on a loan product. A lower DTI ratio indicates a healthier financial situation, which may result in lower rates. Paying down debts and avoiding new debt may help improve your DTI ratio.
- Shop around and compare lenders: Don’t settle for the first lender you come across. Research and compare multiple lenders to find the rates and terms that work best for you. Request rate quotes from several lenders and evaluate offers side by side. Remember to consider not only interest rates, but factors like closing costs and fees as well.
- Select a shorter loan term: Short loan terms typically come with lower interest rates. If you can afford to make higher monthly payments, you may benefit from opting for a shorter loan term. While your monthly payment may increase, you’ll save on interest costs over the life of the loan.
Remember, obtaining the best cash out refinance rates requires research, preparation, and favorable financial conditions. By following these steps and working with a lender you trust, you may increase you chances of securing competitive rates that align with your financial goals. Take the time to evaluate your options, ask questions, and make an informed decision that fits your unique circumstances.