What is a cash-out refinance?

A cash-out refinance is one of the most common ways homeowners access their equity. The process is similar to a standard refinance, but you borrow more than you currently owe and receive the difference as cash at closing. The cash can be used for any purpose: home renovations, debt consolidation, college tuition, starting a business, or major purchases. Lenders typically require you to maintain at least 20% equity after the cash-out, meaning your new loan cannot exceed 80% of your home's value. Your credit score, debt-to-income ratio, and employment history all affect your eligibility. The interest rate on a cash-out refinance is usually slightly higher than a rate-and-term refinance because the lender is taking on more risk. Closing costs are similar to any refinance, typically 2% to 5% of the new loan amount. Cash-out refinancing is a powerful tool, but it reduces your equity and increases your monthly payment. Use the cash wisely and have a clear plan for how it will improve your financial situation.