Compare Rates on a Cash-Out Refinance
Home values have appreciated notably in recent years. That means that you’re probably sitting on a fair amount of equity. That’s the part of your home that you own outright (i.e., your home’s current value minus the outstanding balance on your mortgage).
If you’ve ever wished you could access the money in your house and turn it into cash, we have good news: you can. Lenders designed the cash-out refinance precisely for this purpose.
A cash-out refi lets you liquidate your equity into cash you can use however you want. It does mean taking on more debt, though, so it’s important to weigh the pros and cons and make sure you’re getting the best rate you can.
What is a cash-out refinance?
Like any refinance, a cash-out refi involves replacing your current mortgage with a totally new one. The difference with the cash-out option is that you take out a bigger loan. That extra money turns the equity you currently have in your house into cash in your pocket.
Say, for example, that you have $200,000 left on your mortgage and your house is currently worth $450,000. (There are plenty of online home value estimators if you want to get an idea of your current value.) That means you have $250,000 in equity. (Here’s your guide to calculating equity.)
You could get a cash-out refinance with a new mortgage balance of $350,000. You use $250,000 to pay off your old mortgage, then move forward with your new loan. That extra $100,000 turns into cash in your hand — minus closing costs.
You can get a cash-out refinance with a conventional mortgage, FHA loan, or VA loan. The USDA doesn’t offer a cash-out feature for the loans it backs.
The pros and cons of a cash-out refinance
Sometimes, cashing out equity through a refinance financially benefits the homeowner. Other times, it leaves them with extra debt that puts them in a bind.
Deciding what’s right for you depends on your situation. Weight the benefits and drawbacks based on what this kind of refi would mean for you.
Pros of a cash-out refinance
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This kind of refinance lets you take the equity you’ve built up in your house and turn it into cash. You can then use that cash however you want: for a remodel, education, starting a business, or anything else.
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If you refinance into a lower rate or a longer loan term (e.g. from a 15-year mortgage to a 30-year one), you could potentially get lower monthly payments.
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A cash-out refinance can help you consolidate debt at a lower interest rate than credit cards or personal loans.
Cons of a cash-out refinance
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Refinancing means resetting the clock on your loan. Your new mortgage will function the same way as your current one: your payments in the first few years primarily got toward interest.
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If you take out too much equity and property values drop, you risk going underwater on your mortgage (i.e., owing more than your house is worth).
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Like any refinance, you’ll need to pay closing costs. Lenders calculate those costs as a percentage of the total loan amount. Because you’re borrowing more money than you would with a traditional refinance, you’ll pay more here.
How to compare Cash-Out Refinance Rates mortgage rates
If you only take one piece of advice when you’re getting a mortgage, let it be this: compare rates from at least three different lenders. Doing so can save you thousands of dollars over the life of your loan.
To make it easier for you to put the work in here, follow these steps:
Step 1: Understand your borrower profile
First, you want to get a handle on how mortgage lenders are going to see you. If you look like you’re going to be able to repay your home loan fairly easily, they’ll offer you more favorable conditions. If you look high-risk, you’re going to pay more for your mortgage. Specifically, you’ll be charged a higher interest rate.
So, what makes a borrower low- or high-risk? To decide what kind of loan to offer to you (if any), lenders look at a lot of factors. The biggest ones here include:
- Your monthly income — you don’t want an overly large chunk to have to go toward paying your monthly mortgage bill, which lenders measure with your debt-to-income (DTI) ratio
- Your credit score, which essentially tells them how good you’ve been with managing money in the past
- Your loan-to-value (LTV) ratio (higher is riskier) — the price of the house and your down payment size both come into play here
If you’re not in good shape in any of these areas, putting in some work before you buy (e.g., working on your credit score, lowering your DTI ratio) can help you get a lower interest rate.
Step 2: Use rate tables to see what’s on offer today
There are lots of resources online that show you rate offers from leading lenders. Use a mortgage rate table to get a feel for what kind of interest rates are available from financial institutions that provide home loans in your area.
Ideally, that rate table lets you input personal information, like your credit score and the price of the house you want to buy. This way, the rates you get shown should align with what you’re actually eligible to get. A lot of lenders advertise low starting rates, but only the “best” borrowers will be approved for them once they apply.
Step 3: Get preapproved with three lenders
Once you’ve picked out a few lenders that look good to you, go through their preapproval process. That will mean filling out some paperwork, but it’s the best way to figure out what you can really qualify for in terms of loan size and interest rate.
Have financial documents — like your bank statement and pay stubs — handy to make it easier to complete your preapproval applications.
Step 4: Compare preapprovals
When you get preapproved, the lender should give you documentation about your potential mortgage. Ideally, this gives you a feel for the total amount you’re borrowing, the repayment term, the interest rate, fees, and closing costs.
Line up your quotes from each lender and go through them, paying special attention to the annual percentage rate (APR). This tells you how much you’ll pay each year for the loan including not just interest, but also fees. By looking at APRs, you get a clear idea of what you’ll truly pay if you choose that specific mortgage. This helps you identify the best option for yourself and your financial goals.
If you’re ready to start comparing Cash-Out Refinance Rates rates, use our rate table to get started. We have fields up top where you can input key details like your credit score range and zip code so we can best tailor the mortgage rate offers to you.