A cash out refinance lets you replace your current mortgage with a new loan for a higher amount and get the difference in cash at closing. For example, if you currently have a $200,000 mortgage, you may be able to refinance to a $250,000 mortgage and get $50,000 in cash at closing.
What can you do with cash out refinances? Here are some common reasons homeowners refinance and get cash.
Can you consolidate debts with cash out refinances?
Yes. You can often use cash out refinances to help you consolidate debts – especially when you have high-interest debts from credit cards or other loans. That’s because the interest rates on mortgages are often much lower than the interest rates on other kinds of debt. This means you can lower the amount of money you pay on interest each month, and apply the savings to paying down your debts.
Paying your bills can be easier when you consolidate debts too. Instead of paying several different bills each month, you may be able to pay just one.
Can you pay for home improvements with cash out refinances?
Yes. Paying for home improvements and repairs is a popular use of cash from refinancing. You can pay for building an addition, finishing an attic or basement, remodeling kitchens and bathrooms, and making major repairs to roofs, foundations, plumbing and electrical systems, and heating and cooling systems. You can also use the cash to pay for new paint and carpets, new appliances, and other home refreshes.
Keep in mind that you don’t have to use the cash for just one thing. You could apply part of the money to the cost of home improvements and the rest to debt consolidation.
Can you pay for college and investments with cash out refinances?
Yes. You can spend the money on education. Paying for education can be a good use of the cash from your home’s equity because it can help you and family prepare for professional success. You can also use the cash from refinancing to start your own business, buy a rental or investment property, or help pay for other major goals.
Can you lower your interest rate with cash out refinances?
Yes. It may be possible to lower your mortgage interest rate with cash out refinancing. That’s because it involves getting a new mortgage with a new rate and terms. Depending on your existing loan’s rate and current mortgage interest rates, you might be able to get a better rate when you refinance.
This is one thing that makes cash out refinances different from HELOCs and home equity loans. These are both types of second mortgages with their own rates and terms. When you get these loans, the terms of your current mortgage stay the same.
Can you change to a fixed rate with cash out refinances?
Yes. You can change from an adjustable to a fixed rate when you refinance. You may also be able to change the number of years you have to pay your mortgage off (this is called the loan’s "term").
Increasing the number of years can make your payment lower but cost you more money in interest over the life of the loan. Decreasing the number of years might increase your payment but help you save money on interest.
What else do you need to know about cash out refinances?
You’ll need a significant amount of home equity to qualify for cash out refinancing. You’ll need to apply for a new mortgage, meet credit and other financial requirements, provide documents, and pay closing costs.
When you refinance your mortgage to get cash, your minimum monthly payments may increase. You may pay more in interest over the life of the loan since you are increasing the amount of money you owe too. Look at the benefits and costs, and make the decision that’s right for you!
Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such.
Last reviewed and updated February 2023 by Freedom Mortgage Corporation.