Cash-out refinance pros and cons: Make the right decision

If you’ve built up home equity, a cash-out refinance can turn that value into usable funds by replacing your existing mortgage with a slightly larger one. Once you pay off the old loan, you receive the extra funds directly. Homeowners often use this money for expenses such as renovations and consolidating debt. Refinancing can offer lower interest rates compared with personal loans and credit cards, but it also increases your mortgage balance. This puts your home at risk if payments become unmanageable.

In this article, we’ll weigh the pros and cons of cash-out refinancing to see if it helps you reach your financial goals or just increases your loan balance.

What’s a cash-out refinance on a home?

A cash-out refinance works similarly to a standard refinance. You get a new loan, which may come with a different interest rate and term. After paying off your existing mortgage and covering closing costs, the remaining amount is yours to use.

Let’s say your home is worth $300,000 and you still owe $200,000. That means you’ve built up $100,000 in equity. If you do a cash-out refinance for $250,000, you’d pay off your $200,000 mortgage and walk away with around $50,000 in cash (after closing costs).

Keep in mind that closing costs for a cash-out refinance usually range between 2–5% of the loan amount. They cover expenses such as lender fees, appraisal costs, and title insurance.

Using the example above, 2–5% in closing costs would be $5,000–12,500. So, instead of walking away with the full $50,000 difference, you’d get roughly $37,500–45,000 in cash, depending on the exact costs.

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What are the pros and cons of a cash-out refinance?

Here’s a quick overview of the pros and cons of a cash-out refinance:

5 pros of cash-out refinance

A cash-out refinance can open up different financial possibilities depending on your plans. Let’s take a look at five perks to consider. 

1. Access a large sum of cash

One of the greatest benefits of a cash-out refinance is how much money you can borrow at once. Lenders use your home as collateral, giving them the right to take the property if you fail to repay. Because of this security, they can offer higher loan amounts and lower interest rates than with an unsecured personal loan and credit card.

2. Lock in a predictable monthly payment

With a fixed-rate cash-out refinance, your monthly payment stays steady because the interest rate doesn’t change. This makes budgeting easier, unlike credit cards and variable-rate loans, where payments may jump if rates go up.

3. Gain potential tax advantages

If you use the cash from a refinance for home improvements that increase your property’s value, you may be able to deduct the mortgage interest on your taxes. For example, renovating a kitchen and adding a new bathroom could qualify, giving you potential financial benefit while improving your home. 

4. Consolidate high-interest debt

If you’re carrying several high-interest debts, a cash-out refinance lets you combine them into a single mortgage payment, often at a lower rate. This can make it easier to manage your money and potentially save over time.

5. Increase your home’s value

Putting the money back into your home can pay off in more ways than one. Renovations like an updated kitchen, new roof, and additional room can increase your home’s value and rebuild equity faster after refinancing.

5 cons of cash-out refinance

A cash-out refinance can be a useful option for some, but it may not suit everyone. Knowing these five main drawbacks helps you decide whether it makes sense for you.

1. Risk losing your home

The biggest concern is that your home becomes collateral for the new loan. Missing a payment can lead to more serious consequences than missing a credit card bill, like foreclosure and credit damage.

2. Pay new closing costs

Refinancing requires covering closing costs, such as an appraisal, title insurance, and lender fees. These expenses can accumulate quickly, so factor them into your decision. You can use Better’s refinance calculator to estimate the total.

3. Extend your loan term

Lower monthly payments can reduce your immediate costs, but spreading your loan over a longer term means you’ll pay more in interest and take longer to fully own your home. So, make sure your budget can handle the extended commitment, and consider how closing costs and plans like remodeling and selling could affect your overall benefit.

4. Increase your total debt

A cash-out refinance replaces your original mortgage with a larger loan, which increases your total debt. This can raise your monthly payments and total interest over time, so it’s important to confirm your budget can comfortably handle the new loan.

5. Face a lengthy application and closing process

The overall refinancing process usually takes about 30–60 days from start to finish. After you apply, the lender reviews documents like W-2s and bank statements to decide whether to move forward. If everything clears, you sign the necessary paperwork and cover any closing costs. This timeline can be inconvenient and interfere with planned moves, home improvements, and other financial goals.

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Cash-out refinance requirements

Lenders have a few key boxes to check before approving a cash-out refinance mortgage. These rules can differ, so it’s smart to compare and find the best option for your situation.

Here are the main factors to consider:

— Build sufficient home equity: You’ll generally need at least 20% equity, meaning you’ve paid down at least one-fifth of your home’s current value, to qualify for cash-out refinancing. Maximum loan-to-value limits vary by property type. For example, lenders allow up to 80% for a single-unit primary residence. 

— Meet the ownership timeline: Generally, you must own your home for a minimum period before refinancing. Conventional loans usually need six months of ownership. VA loans require 210 days, and FHA loans require a year of on-time payments before you can cash out.

— Maintain a solid credit score: Some lenders accept credit scores around 620. However, borrowers with stronger credit usually qualify for better terms, such as lower interest rates and smaller down payments.

— Manage your debt-to-income (DTI) ratio: Most banks like to see a DTI of 43% or less. If yours is higher, lenders might ask for extra savings as a safety buffer before approving your loan.

Is a cash-out refinance a good idea?

A cash-out refinance can make sense if your situation aligns with these factors:

— You hold more equity in your home than before.

— You’re eligible for a better interest rate than your existing loan.

— You want to consolidate high-interest debt into one payment.

— You plan to use the funds for home improvements that increase your property’s value.

— You can comfortably cover closing costs and adjusted monthly payments.

— You plan to stay in your home long enough to benefit from the refinance.

— You want predictable monthly payments over variable-rate options like a home equity line-of-credit (HELOC).

Cash-out mortgage refinance alternatives

If you’re unsure whether cash-out refinancing is the right move, consider one of these alternatives that let you tap into extra funds: 

— HELOC: A HELOC lets you borrow what you need, when you need it, using your home as collateral. You can draw funds multiple times up to your credit limit and only pay interest on what you use, making it ideal for ongoing expenses and projects. Check Better’s cash-out rates and HELOC calculator to compare payments and savings quickly.

— Home equity loan: This option gives you a lump sum at a fixed interest rate and uses your home as collateral. Unlike a refinance, it keeps your current mortgage in place.

— Personal loan: When you don’t want to use your home as collateral, a personal loan may be a more flexible alternative. It’s important to note, though, that these loan types typically carry higher interest rates than home-backed options.

Explore your refinance options with Better

Still wondering if a cash-out refinance is worth it? It depends on how you plan to use the funds and whether you intend to stay in your home for the foreseeable future. If the money helps improve your property, pay off high-interest debt, and secure better loan terms, cashing out can be a smart choice. But if it only increases debt and stretches your loan term without clear benefits, the trade-offs may outweigh the advantages.

A cash-out refinance works best when it aligns with your broader financial goals. Take a look at your expenses and plans to see if it fits your strategy. Better simplifies the process with digital tools, easy rate comparisons, and approvals in as little as three minutes. 

Try Better today and see how much cash you could access from your home. 

...in as little as 3 minutes – no credit impact