A cash-out refinance means replacing your current mortgage with another, larger one — and pocketing the difference. It can be useful for achieving financial goals, but it still means borrowing a large sum of money with interest. Figure out how much you could cash out, and balance that against what you really need before you decide to pursue this kind of refinance. 

How a cash-out refinance works

Before we talk about cash-out refis specifically, let’s look at refinancing in general. 

A refinance doesn’t tweak your existing home loan. Instead, it means taking out a completely new mortgage. You use part of that mortgage to pay off your old home loan. Then, you move forward making monthly payments on the new refinanced mortgage.

With a cash-out refinance, those monthly payments could get bigger. That’s because this kind of refinance replaces your former mortgage with a bigger loan. Taking out a larger loan amount lets you convert some of your home equity into cash.

Equity is the amount of your house that you own outright. If you have a house worth $350,000 and you have $200,000 left on your mortgage, for example, your equity is $150,000. 

If you do nothing, your equity keeps growing as you keep paying off your mortgage. You don’t really have access to that money until you sell the house, though. So some homeowners choose a cash-out refinance.

Understanding the math on a cash-out refinance

If you’re thinking about this kind of home loan, you have a few steps to figure out how much money it could put in your pocket:

Step 1: Calculate your equity

The first step in figuring out how much cash you could get out of your house is calculating your equity. 

The math here’s pretty simple. Take your home’s current value and subtract the amount left on your mortgage from it.

Equity = Current home value – Outstanding mortgage balance

Note that we say current value. This probably isn’t the same amount as what you paid for the house. Online home value estimators can help you get a ballpark feel for what your house is currently worth. If you do decide to do a cash-out refinance, the lender will almost certainly require a professional appraisal to verify the house’s value. 

You won’t be able to pull out the full amount of your equity (more on that next). But doing this first bit of number-crunching helps you figure out if you’ve got a sizable enough chunk to tap. 

Step 2: Figure out your maximum loan amount

Lenders set a cap on how much you can borrow called the loan-to-value (LTV) ratio. Basically, they want to make sure if you stop repaying your mortgage, they can make up their money by selling the home. With that in mind, most lenders set their LTV ratio cap at 80% (although some go up to 90% or even higher). 

To calculate your maximum loan amount, then, the math looks like this:

Maximum loan amount = Current home value * Maximum LTV ratio (usually 80%)

Let’s go back to our previous example of a house worth $350,000. The maximum that borrower could get through a cash-out refinance is likely $280,000 (350,000 * 0.08).

If you don’t want to crunch the numbers yourself, you can also use our LTV ratio calculator. 

Step 3: Find out how much cash you could liquidate

The amount of cash you could potentially pocket from your refi looks like this:

Cash out = New loan amount (calculated in Step 2) – Outstanding mortgage balance

So for our homeowner with a $280,000 maximum loan amount and $150,000 left on their mortgage, that could mean $130,000 in their pocket. 

You shouldn’t necessarily cash out the maximum amount possible. This is money you’re going to have to pay back — and with interest. Still, doing this math helps you figure out if a cash-out refinance could be the right option for your financial goals. If you’re trying to tackle a remodel and need a certain budget or you want to pay down a high-interest credit card, you can find out if you’ll be able to cash out enough. 

The pros and cons of a cash-out refinance

Just because you can do a cash-out refinance doesn’t mean you should. Weigh the pros and cons first. 

Pros

• You can use the cash however you want. The cash you get from converting your equity can be used however you want. Maybe you’re trying to start your own business or pay for an education. This option allows you to liquidate your home equity to move toward your financial goals. 
• It can help you improve your financial standing. The Consumer Financial Protection Bureau (CFPB) recently evaluated cash-out refis. It found that many borrowers used this kind of refinance to pay down higher-interest debt, like credit cards and car loans. In doing so, they saw “sharp increases in their credit scores in the quarter after refinance,” per the CFPB. 
• You could get more favorable loan terms. If you can score a lower interest rate, you might be able to cash out your equity without a big jump in your monthly payment. 

Cons

• You’ll have to pay closing costs. These are usually thousands of dollars, due upfront when you get the cash-out refinance. 
• You could (read: probably will) pay more in interest. Interest rates are high right now, so you’ll probably need to refinance with a higher rate. Plus, taking out more money means paying even more in interest over time. 
• You’ll probably be paying off your house for longer. Unless you refi into a shorter loan term, your cash-out refinance means resetting the clock on your mortgage. 

Exploring a cash-out refinance for yourself

If you think a cash-out refinance could be right for you, start by comparing today’s cash-out refi interest rates to your current mortgage’s rate. Understanding what this new home loan could mean — and how much equity you could unlock — helps you decide if this option’s right for you. 

‍