Should I give up my low rate? Cash-out vs keeping your mortgage

What is a cash-out refinance?

A cash-out refinance replaces your current mortgage with a new, larger one, and you receive the difference in cash at closing. The new loan has a new rate, a new term and new closing costs.

The key detail is that the new rate applies to the whole loan, not just the cash you take out. If you owe a lot at a low rate, all of that balance moves to today's rate.

What can you use cash-out money for?

Almost anything. Home improvements are one of the most common uses, and a renovation can add value to the home itself. Homeowners also use cash-out money for a child's college tuition, to pay off credit cards and other high-interest debt, or for other investments, like a down payment on a rental property or money for a business.

Because a mortgage is secured by your home, its rate is usually far lower than a credit card, personal loan or many student loans. That makes your home equity one of the least expensive ways to borrow for a big expense.

How much cash can you take out?

Most cash-out loans let you borrow up to a set share of your home's value, usually around 80%, including what you already owe. VA cash-out loans for eligible veterans can allow more.

Say your home is worth a certain amount and you owe half of it. On most loans you could take out the difference between what you owe and 80% of the value, minus closing costs. The cash-out calculator runs the numbers for your home.

What are the other ways to borrow against your home?

A home equity loan is a second mortgage for a fixed amount, usually with a fixed rate and its own monthly payment. A home equity line of credit, or HELOC, works more like a credit card secured by your house. You draw what you need, and the rate usually moves with the market.

Both keep your first mortgage and its rate untouched. The trade-off is that second-mortgage rates are usually higher than first-mortgage rates, and you'll have two payments instead of one. Our home equity page explains how each option works.

How do you compare a cash-out with keeping your mortgage?

Look at the total cost of all your housing debt each way, not just the rate on the new money.

With a cash-out, that's one loan: your whole new balance at the new rate. With a second loan, it's two: your current balance at your current low rate, plus the cash at the second loan's rate. The option with the lower combined monthly cost and lower total interest over the time you'll keep it usually wins.

Here's the pattern that usually holds. If you owe a lot and only need a little cash, keeping your mortgage and adding a second loan tends to cost less. If you owe a little and need a lot of cash, or your current rate is close to today's, a cash-out often comes out ahead.

When does a cash-out refinance make sense?

A cash-out often makes sense when the cash goes toward something that pays you back, like a renovation that adds value, an education, or another investment. It also makes sense for paying off credit cards or other high-interest debt. Replacing those payments with one mortgage payment can lower what you pay each month by a lot, even at a higher mortgage rate. Just be honest with yourself about not running the cards back up.

It can also make sense when the cash you need is large compared with what you owe, when your current rate isn't much below today's, or when you'd rather have one fixed payment than a second loan with a rate that can rise.

It makes less sense when you have a large balance at a rate well below today's and only need a modest amount of cash. In that case, you'd be paying a higher rate on a lot of money to borrow a little.

What else should you think about?

A cash-out refinance has closing costs, much like a purchase. It also usually starts a new loan term. If you're ten years into your mortgage and start over with a brand-new full-length loan, you'll be paying on your house longer unless you choose a shorter term or pay extra.

You'll also need to qualify again, with your income, credit and the home's value checked. When refinancing makes sense covers the break-even math for any refinance.

Quick answers

Does a cash-out refinance change the rate on my whole mortgage?

Yes. A cash-out refinance replaces your entire mortgage, so the new rate applies to the whole balance, not just the cash you take out.

Is a HELOC better than a cash-out refinance?

It depends on how much you owe, how much cash you need and your current rate. A HELOC keeps your first mortgage, but its rate is usually higher and often variable.

How much equity can I take out of my home?

Most cash-out loans let you borrow up to around 80% of your home's value, including what you already owe. VA loans can allow more.

What can I use a cash-out refinance for?

Almost anything, including home improvements, college tuition, paying off debt, or another investment like a rental property.

Is it smart to do a cash-out refinance to pay off credit cards?

It can be, because mortgage rates are usually far lower than credit card rates. It only works if you don't build the card balances back up.