Is a Cash-Out Refinance a Good Idea?

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

cash out refinance
Logo

We’ve got your back! Student Loan Hero is a completely free website 100% focused on helping student loan borrowers get the answers they need. Read more

How do we make money? It’s actually pretty simple. If you choose to check out and become a customer of any of the loan providers featured on our site, we get compensated for sending you their way. This helps pay for our amazing staff of writers (many of which are paying back student loans of their own!).

Bottom line: We’re here for you. So please learn all you can, email us with any questions, and feel free to visit or not visit any of the loan providers on our site. Read less

If you want a way to increase your cash flow, you could take on a side hustle, look for a higher-paying job, or cut your spending. But what if you need money faster?

If you own a home, you could consider a cash-out refinance loan. The mortgage refinancing option could allow you to get tens of thousands of dollars from your equity. As with any other significant financial decision, such as taking out student loans, there are important things to consider about the process.

Here’s everything you need to know to decide if a cash-out refinance loan is a good option for you.

What is a cash-out refinance loan?

After the housing crash in 2008, people started looking at refinancing mortgages with low interest rates. But you might not have heard of cash-out refinance. So, what is it exactly?

A cash-out refinance is a type of mortgage refinance in which you take out a new loan to replace your current one. But the amount of the new loan will be higher than the balance you owe on the old mortgage, and you’ll receive the difference in cash. So, essentially, you convert some of your home equity into liquid funds.

To break down the math, let’s pretend you have a $250,000 home, owe $150,000 on the mortgage, and want $50,000 in cash flow. You’d take out a new loan for $200,000, which would pay off the $150,000 you owe and give you $50,000 in cash. Ideally, the cash-out refinance loan would have a lower interest rate than your current one.

You might consider taking this path if you need to fund a home renovation, which theoretically would increase the value of the house. Sometimes, people use the money for college tuition or to pay off student loans.

Cash-out refinance loan requirements

You must meet several requirements to be eligible for a cash-out refinance loan. These are three main criteria to consider.

1. Loan-to-value (LTV) ratio

To determine your LTV ratio, the lender views your current mortgage as a percentage of your home’s market value. So, the LTV ratio is your mortgage balance divided by the appraised home value.

Let’s say you have $75,000 left on your current mortgage and your home is valued at $100,000. The $75,000 would be divided by $100,000 to arrive at a 75% LTV ratio. Many lenders cap the maximum LTV ratio at 75%, according to Loan.com. So, you can get a loan for 75% of the current market value of your home, and you must have equity of more than 25%.

That’s why getting a home appraisal is an important step in the process. The value of your house is a key element in determining your LTV ratio. If you’re eying a cash-out refinance, be sure to repair anything that’s broken in your home and make updates to ensure the best appraisal.

2. Credit score

Your credit score can affect the interest rate on a cash-out refinance loan. Your home might meet the LTV ratio requirements, but if you have bad credit, your application could be denied or your interest rate could be high.

It typically wouldn’t make sense to take out a new loan on your home if the interest rate would be higher than your current mortgage rate. The goal is to keep your mortgage payments low while raising cash. If you’ll have to pay more in interest and therefore have a higher monthly payment, a cash-out refinance might not be a wise financial move.

3. Length of homeownership

To ensure you can afford the monthly mortgage, many lenders will require you to have made a year’s worth of payments on your current mortgage before applying for a cash-out refinance loan.

If you’ve lived in your home for less than a year and had it appraised before you got your mortgage, you’ll need to get a new appraisal. Then the lender likely will take the lower appraisal value to determine your loan amount.

Pros of a cash-out refinance

There are many pros and cons to keep in mind with a cash-out refinance loan. Here are some of the main benefits.

  • It can cover major expenses: One of the biggest draws is the cash flow provided by the loan. You can get a huge chunk of money to help cover costs such as for investing in a new business or making home improvements. Or you could repay a large debt, such as an outstanding credit card bill, student loans, or unexpected medical expenses.
  • Interest rate could be lower: By going the cash-out refinance route, you could secure a lower interest rate than if you took out personal loans to get the same influx of liquid cash.
  • You could get a tax advantage: The entire interest on a cash-out refinance loan is tax deductible if you use the money to make home repairs or improvements. If you use the money for something else, the interest is tax-deductible only up to $50,000 for an individual or $100,000 for a couple. This would make a cash-out refinance a better option than credit card debt because that interest is not tax deductible.

Cons of a cash-out refinance

There are some downsides to a cash-out refinance loan to consider.

  • There are hidden costs: As with any mortgage refinancing loan, you’ll have to pay closing costs and interest on the chunk of cash you get as well as on the cash-out refinance amount. In addition, you’ll have to pay a fee to have your home appraised for the LTV ratio. So you could pay up to thousands of dollars upfront in fees and costs, in addition to the thousands of dollars in interest you’d pay over the entire loan period.
  • Your home could be at risk: Whenever you take out equity in your home, it puts the property in a risky situation if the value decreases. According to the July 2017 National Mortgage Risk Index, cash-out refinance loans are a major reason mortgages are at the same high risk of defaulting as they were during the 2008 housing crash. So, be sure you’re in good financial standing before making a risky move.
  • Unsecured debt becomes secured debt: This is one of the biggest downsides to cash-out refinance loans. If you use the money to pay off credit card debt or student loans, you’d convert unsecured debt (no collateral required) into secured debt (collateral required). Your home would be the collateral in this case. If you can’t make the monthly payments on your new mortgage or end up filing for bankruptcy, the lender can foreclose on your house. Credit card debt, on the other hand, can be reduced or discharged in a bankruptcy. Student loans are hard to discharge in bankruptcy, but you won’t lose your home if you can’t pay.

Is a cash-out refinance loan your best option?

A cash-out refinance loan could be a good option if you need immediate cash flow for home improvements or need to pay down high-interest debt. You could get a better interest rate, too.

But if that’s not the case, you could land in a situation where you’re unable to pay the new loan and could lose your home. Or, you could end up paying more in interest over a longer period. You should never use a cash-out refinance loan to pay for nonessential things such as a vacation.

Alternative options for increasing your cash flow include getting a home equity line of credit, a home equity loan, or a reverse mortgage if you’re age 62 or older. If you’re dealing with high-interest debt, then you should consider debt consolidation companies.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
6.28% – 14.87%1$5,000 - $100,000
Check rate nowon SLH's secure site
6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.