What is a cash-out refinance?
With a cash-out refinance, you essentially replace your mortgage with a new one that's higher than your current one. The difference between your old loan and your new one will go straight into your pocket at closing. A cash-out refinance can come in handy when you need to manage emergency medical expenses, pay for college expenses or even decide to buy a vacation home or investment property.
How to use the Cash-Out Refinance Calculator
It’s not as simple as “my home is worth $400,000, I owe $200,000, so I can get $200,000.” There are limitations to how much you can cash out based on your loan-to-value (LTV) ratio. Our handy Cash-Out Refinance Calculator does the behind-the-scenes work to make it easy for you to crunch the numbers. Here’s how it works.
- Enter your current mortgage details and your home's current value: Check your latest statement to get an accurate mortgage balance, but don’t worry about an official appraisal. You can still use the calculator with a ballpark number that you find on real estate websites or by using real estate comps.
- Choose a loan term: Choose between 15-year, 20-year or 30-year fixed terms. If you’d like to refinance into an adjustable-rate mortgage (ARM), you can still use the calculator based on the overall loan term of the ARM.
- Review and adjust the numbers: The calculator estimates your new loan amount and monthly payment based on how much you choose to take out. It will also allow you to play with your minimum and maximum cash-out amounts so you can see how it impacts your monthly payment. You can also adjust your home value to see how changes in the market would affect your maximum loan amount.
No matter what, keep in mind that a cash-out refinance does involve taking on a bigger mortgage with different terms and a new rate. So, remember to think long term about your finances before taking this leap.
What are the requirements to qualify for cash-out refinancing?
Here’s a quick check to see if you qualify for cash-out refinancing: if you have a credit score of at least 620, a debt-to-income ratio (DTI) of 43% or less and at least 20% equity in your home, you generally should be able to get a green light. Bonus points if your numbers are looking even better than this; then you are likely in a great position to get a lower interest rate and access to more cash, too.
There’s a good reason banks have these requirements: they were put in place to protect both you and the lender from entering a risky financial situation. A strong credit score minimizes the risk of default, a low DTI ensures you aren't stretched too thin financially and sufficient equity means you have a tangible asset (your home, in this case) backing your loan.
When does it make sense to get a cash-out refinance?
In the right circumstances, cash-out refinancing can be a game-changer. If you're swimming in high-interest credit card debt, a cash-out refi could save you in interest charges. Or, if your kitchen is starting to feel like a 90s throwback, a cash-out refi could help bring it back to life, boosting your home's value and your happiness with your home.
On the other hand, a cash-out refinance is a serious commitment. This means it’s not a smart move if you just want to splurge on a lavish vacation or buy a boat named after your border collie. Remember, your home is the collateral here and it’s worth protecting. Always consider the big picture and think long term.
How much does a cash-out refinance cost?
A cash-out refinance typically costs about 2% to 6% of the new loan amount in closing costs. This covers a variety of expenses, including appraisal fees, attorney fees and origination fees.
Before you get your hopes up, make sure to do the math. Factor in every last fee to see if cash-out refinancing makes good financial sense for you. Using a cash-out refinance calculator will help you see if it's worth your effort.
How can a cash-out refinance lower my monthly mortgage payment?
Sometimes, cash-out refinancing can actually lower your monthly mortgage payment. This can happen if you snag a lower interest rate than your original loan or if you extend the loan term.
One important call-out here: extending the term may reduce your monthly payments, but you'll end up paying more in interest over the entire life of the loan. Everything in life comes with trade-offs, even mortgages. If you need help making the right move, reach out to a Citi mortgage loan officer who can walk you through what could work for you.
Other ways to tap into your home equity
A cash-out refi isn’t the only way to access your home equity. A home equity line of credit (HELOC) or home equity loan can be a popular option, too. A HELOC works like a credit card that’s secured by your home. It’s a flexible option with variable interest rates. A home equity loan pays you upfront cash like a cash-out refinance, but it becomes a separate, second loan rather than a new mortgage.
Still noodling over if refinancing is right for you? Whether you're looking to invest in a home makeover or just streamline your debts, our cash-out refinance payment calculator can help you navigate the possibilities. Citi’s offerings and lending guidelines may differ from other lenders, but if you’re looking for some extra guidance in your decision-making process, our team can help!