Review the current mortgage
Start with the remaining mortgage balance, property details, ownership goals, and a discussion of the proposed use of funds.
Refinance education
Cash-Out Refinance
A cash-out refinance replaces an existing mortgage with a new, larger mortgage. The existing mortgage is paid off from the new loan. After applicable costs, prepaid items, and other required amounts are paid, eligible remaining proceeds may be received by the borrower.
Available proceeds depend on appraisal, existing payoff, property, program, borrower qualifications, and transaction costs. It is not a promise of access to any particular amount.
The mechanics
How cash-out refinancing works
Evaluate the new loan
A new mortgage amount, loan term, rate structure, and transaction costs are evaluated under applicable program and underwriting requirements.
Pay off and distribute
At closing, the existing mortgage and required transaction items are paid. Eligible remaining proceeds may be received by the borrower.
Use equity thoughtfully
Potential reasons homeowners consider cash-out refinancing
Home improvements
Some homeowners consider using eligible proceeds for repairs, renovations, or projects that support their living or investment plan.
Major expenses or liquidity
A transaction may be explored for planned expenses or reserves, but the new mortgage obligation should be weighed against the intended benefit.
Debt consolidation
Consolidating debt into mortgage debt is not automatically beneficial. It can extend repayment, change collateral risk, and increase the total cost of borrowing depending on the terms.
Investment objectives
Investors may evaluate eligible proceeds as one part of a broader strategy, while considering risk, reserves, cash flow, and the new mortgage obligation.
Compare structures
Cash-out refinance vs. HELOC vs. home equity loan
| Question | Cash-out refinance | HELOC | Home equity loan |
|---|---|---|---|
| Primary structure | Replaces the existing first mortgage | Typically a separate revolving line | Typically a separate closed-end second mortgage |
| Use of funds | Eligible proceeds received at closing | May allow draws under an approved line | Generally a lump-sum structure |
| Existing first mortgage | Usually paid off and replaced | Usually remains in place | Usually remains in place |
| Key consideration | Changes the first-mortgage terms and costs | Rate, draw, repayment, and line terms may vary | Second-lien costs, payment, and structure may differ |
Review before proceeding
Questions to ask before using home equity
- What is the full purpose of the funds, and is there a less costly alternative?
- How will the new loan change my payment, term, and total finance charges?
- What are the estimated closing costs and how will they be paid?
- Will converting other obligations into mortgage debt extend repayment or change risk?
- What happens if my future income, expenses, or property plans change?
- Would a rate-and-term refinance, HELOC, or home equity loan better fit the objective?
Clear answers
Frequently asked questions
What is a cash-out refinance?
A cash-out refinance replaces an existing mortgage with a new, larger mortgage. After the existing mortgage, applicable costs, and other required items are paid, eligible remaining proceeds may be received by the borrower, subject to appraisal, program, property, and borrower qualifications.
Can I use cash-out proceeds for any purpose?
Borrowers may have different objectives, including home improvements, reserves, major expenses, debt consolidation, or investment plans. The best use depends on the borrower’s overall financial situation and the trade-offs of converting other obligations into mortgage debt.
Is a cash-out refinance the same as a HELOC?
No. A cash-out refinance replaces the first mortgage. A home equity line of credit, or HELOC, is typically a separate revolving line secured by the home. The structure, payment, rate behavior, costs, and qualification requirements can differ.
Talk with Julia
Discuss your home-equity scenario
Review your current mortgage, property plans, and questions before deciding whether a cash-out refinance fits.