What is Cash-Out Refinancing?
Cash-out refinancing allows homeowners to replace their existing mortgage with a larger loan and receive the difference in cash.
For example, if you owe $200,000 on a home worth $400,000, you could refinance for $300,000, pay off the original loan, and receive $100,000 in cash (minus closing costs).
This strategy taps into home equity—the portion of your home you actually own—to access funds for various purposes.
Lenders typically allow you to borrow up to 80% of your home's value, leaving 20% equity as a cushion.
The cash can be used for home improvements (which may add value to your property), debt consolidation (especially high-interest credit cards), education expenses, business investments, or emergency funds.
The key advantage over home equity loans is getting a single mortgage, often at lower rates than second mortgages or personal loans.
However, cash-out refinancing increases your total debt and extends your repayment timeline—you're essentially restarting your mortgage clock.
Closing costs typically run 2-5% of the loan amount ($6,000-$15,000 on a $300,000 refinance), so you need to ensure the benefits justify these expenses.
Interest rates for cash-out refinances are usually 0.25-0.5% higher than standard refinances because they're considered riskier.
The decision depends on current rates versus your existing rate, how long you plan to stay in the home, and whether alternative funding sources make more sense.
With strategic use, cash-out refinancing can be a powerful financial tool, but misuse can leave you overleveraged and at risk if property values decline.