How a Cash-Out Refinance Works
You take out a new mortgage larger than your current balance and receive the difference as a lump sum at closing. If your home is worth $400,000 and you owe $200,000, a lender allowing 80% loan-to-value could let you borrow up to $320,000 — giving you roughly $120,000 in cash minus closing costs.
Common Uses
- Home renovations that increase the property's value
- Paying off higher-interest debt like credit cards or personal loans
- Funding a major expense such as tuition or medical costs
- Buying an investment property or making a large purchase
The Real Cost
Cash-out refinances typically price 0.125%-0.5% higher than a rate-and-term refinance of the same term, since the larger loan balance is riskier for the lender. You'll also pay closing costs — typically 2-5% of the new loan amount — either upfront or rolled into the loan balance.
Risks to Weigh Carefully
A cash-out refinance turns unsecured or lower-priority debt into debt secured by your home — if you can't make payments, foreclosure becomes a real risk in a way credit card debt never was. It also resets your amortization schedule and can extend how long you're paying on your home overall.
Alternatives Worth Comparing
A home equity line of credit (HELOC) or home equity loan lets you borrow against equity without touching your existing mortgage rate — often the better choice if you already have a low rate you don't want to give up. Cash-out refinancing tends to make more sense when today's rates are close to or below your current rate anyway.
This page is for educational purposes and isn't personalized financial or lending advice. Rates, terms, and lender offers change frequently — confirm current figures directly with lenders before acting.