How much equity do you need for a cash-out refinance?

If you’ve built up equity in your home and need access to cash, one option available to you is a cash-out refinance.

A cash-out refinance will pay off your existing mortgage and replace it with a newly financed home loan, where the balance will be higher than your previous mortgage, allowing you to withdraw those additional funds.

Typically, refinancing your mortgage can have positive consequences because it may allow you to:

• Decrease your monthly mortgage payments,
• Access cash through the equity available in your home,
• Renegotiate certain loan terms,
• Pay off your mortgage balance faster, or
• Negotiate a lower interest rate.

However, with a traditional mortgage refinance, you won’t have any access to additional cash. A cash-out refinance gives you access to money, similar to what you could receive through a personal loan or home equity loan. You can then use that money for whatever you like, such as consolidating your high-interest debt, investing, vacations, or renovating your home.

Keep in mind that lenders generally want you to maintain at least 20% equity in your home after the cash-out refinance, though this can vary across lenders. Lenders will also look at your combined loan-to-value (LTV) ratio to determine whether you qualify for a cash-out refinance and how much money you can take out.

A cash-out refinance calculator, like Discover® Home Loans Cash-Out Refinance Calculator, can calculate how much cash you can get out of your home and, if you’re looking to consolidate debt, how much money you could save by consolidating high-interest debt.

CLTV: Calculating how much equity you can cash out

Want to know how much equity you can cash out through a cash-out refinance?

The amount you can receive as funds through a cash-out refinance will depend on your combined loan-to-value ratio (CLTV). Your CLTV is determined by dividing your current mortgage loans (including all mortgages, such as first and second mortgages and home equity lines of credit) by the appraised value of the home:

CLTV = current mortgage loan balance + any additional home loans ÷ appraised value of the home

So, if your current mortgage balance is $150,000 and you have a balance of $50,000 on a home equity loan, your “combined loan” is $200,000. If your home is valued at $400,000, your CLTV would be 50%:

Current CLTV = $200,000 ÷ $400,000 = 0.50 or 50%

Different lenders have varying maximum CLTV percentages for a cash-out refinance. At Discover Home Loans, you can borrow up to 90% of your home’s appraised value. Multiply that percentage by your home’s appraised value to get your maximum loan amount. Using our example:

Maximum combined loan amount = $400,000 × 0.90 = $360,000

Then, subtract your existing mortgage balance and any outstanding home loans from the maximum loan amount to find the maximum cash you can receive through cash-out refinancing:

Cash-out refinancing borrowing limit = $360,000 − $200,000 (loan balance) = $160,000

The $200,000 goes to pay off your existing mortgages and your new loan can allow you to take out up to $160,000.

You can enter your numbers in our Cash-Out Refinance Calculator to see your borrowing limits.

How a cash-out refinance works

If you’re looking for a cash-out refinance, a lender will assess your existing mortgage loan’s terms, the outstanding balance on your mortgage, and your credit profile. If a lender approves you for a cash-out refinance, the lender will make you an offer for a new loan to pay off your existing mortgage and provide you with the remaining balance in cash.

That cash is tax-free because it isn’t considered income. Once approved, you can use that money in whatever way you like:

• Renovating your home
• Paying off high-interest debt
• Purchasing an investment property
• Covering emergency costs
• Paying for tuition

If you are ready to apply for a cash-out refinance, you can begin online application process for Discover.

How to increase your home’s available equity

You can take steps to increase the available equity in your home.

Making larger or more frequent payments on your mortgage will lower the balance owed. Meanwhile, making improvements to your home can increase the appraisal value, which can also result in a higher maximum cash-out value.

Comparing cash-out refinancing vs. home equity loans

With a cash-out refinance, you pay what you owe on existing mortgage and enter into a new mortgage loan. You’ll only pay one monthly bills towards the newly financed mortgage loan.

A home equity loan, however, is a second mortgage on your home, in addition to the original mortgage. This means that you now have two separate creditors who can place liens on your home and two monthly bills to keep track of. The upside, however, is that when rates are rising, a home equity loan allows you to tap into your equity without sacrificing the rate on your primary mortgage.

Find out how much your equity can earn with a cash-out refinance

A Discover cash-out refinance may be the right option for you to consider if you have equity in your home, or have an upcoming expense that you can’t get funding for or that is more expensive than cash-out refinancing.