What is a cash-out refinance?
Steps to determine if a cash-out refinance is right for you
- Determine your home equity. Your home equity can be determined by looking at the market value of your home minus what you still owe. For instance, if your home is worth $250,000, and you owe $150,000, then your home equity is $100,000.
- Understand maximum loan amounts. In general, 80% of your home's value is the maximum loan amount that can be drawn. If your home is worth $250,000, then the maximum you can draw would be $200,000 ($250,000 multiplied by 0.80).
- Estimate your total cash-out. Subtracting your current loan amount from your maximum loan amount will determine how much cash you can take out. For instance, you would take the $250,000 (home value) minus $200,000 (maximum loan amount), which means your cash-out would be $50,000.
With a cash-out refinance, you’ll need to weigh the benefit of how you plan to use the money against the amount of time it'll take to pay off the loan.
Potential benefits
- Lower interest rate. If you choose to refinance, you may end up with a lower interest rate if rates are lower than when you bought your home.
- Access to cash. Cash-out refinances can help with large expenses like home renovations or college tuition.
- Debt consolidation. A cash-out refinance may help you pay off any high-interest credit cards and could help you save money in interest.
Considerations for a cash-out refinance
- New terms. A cash-out refinance replaces your original mortgage. This means your monthly payments could be different, and it may take longer to pay off your loan.
- Closing costs. You’ll need to pay closing costs for a cash-out refinance just as you did when you bought your home. You should consider whether the closing costs could deplete any funds you may save by completing a cash-out refinance.
Not sure if a cash-out refinance is right for you? Start by using our personalized refinance quote calculator.
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Using a cash-out refinance to consolidate debt increases your mortgage debt, reduces equity, and extends the term on shorter-term debt and secures such debts with your home. The relative benefits you receive from debt consolidation will vary depending on your individual circumstances. You should consider that debt consolidation may increase the total number of monthly payments and the total amount paid over the term of the loan. To enjoy the benefits of debt consolidation, you should not carry new credit card or high interest rate debt. By refinancing your existing mortgage, your total finance charges may be higher over the life of the loan.
If you extend your loan term, you may pay more interest over the life of your loan.
If you are a service member on active duty, an eligible spouse, partner, or dependent, or currently receiving SCRA benefits, please consult with your legal advisor prior to seeking a refinance of your existing mortgage loan. In some cases, a refinance may impact your eligibility for benefits under the Servicemembers Civil Relief Act or applicable state law.
Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A.
LRC-0324
