Cash-Out Refinance Pros & Cons

A cash-out refinance is a mortgage refinancing solution that allows homeowners to replace their existing mortgage with a new one–usually at a higher loan amount–and receive the difference between the two loans in cash. Essentially, it allows you to "cash out" a portion of your home's equity in the form of a lump-sum payment while simultaneously refinancing your mortgage.

Here’s, briefly, how a cash-out refinance works: you take out a new mortgage for more than what you currently owe on your home, pay off the old loan with part of the new one, and keep the remaining funds. The new mortgage may have different terms – such as a new interest rate, repayment period, or monthly payment – and is secured by your home, just like your original loan.

Homeowners commonly use cash-out refinances for various purposes, such as home improvements, debt consolidation, or investing in other opportunities. The cash-out refinance in particular can be appealing in situations where the homeowner can take advantage of lower mortgage interest rates while accessing the equity they've built in their homes.

Of course, the first step in the process of any big financial decision should be to research your choices! If you’re looking for the best method to tap into your growing home equity and make it work for you, read on to see the benefits and the drawbacks of a cash-out refinance.

Pros of a Cash-Out Refinance

Let’s start with the good stuff.

Lower Interest Rates

Check out the current mortgage interest rates. Are they lower than the rate you’re paying for your present mortgage? A cash-out refinance would allow you to not only replace that mortgage with a new one and take the difference in cash, but also secure the more favorable terms. Say hello to lower monthly payments and long-term interest savings!

Larger Loans

When you opt for a cash-out refinance, you can potentially secure a larger loan amount than what is typically available through alternative borrowing methods, especially such as personal loans or credit cards.

Tax Deductions

Tax-wise, there may be some good news with a cash-out refinance: the cash you take out of your equity during the transaction likely won’t be considered as income by the IRS. On top of this, depending on how you use the loan proceeds, a cash-out refinance might qualify you for a tax deduction, too! If you apply the funds to a renovation project that increases the value of your home (called “capital improvements”), you may be able to deduct the interest of your loan. Be sure to check recent tax laws, nationally and at the state level, and consult with a trusted professional to see what tax benefits may be available to you.

Longer, More Predictable Payment Period

Many cash-out refinances are structured as 30-year fixed-rate mortgages, which means your interest rate and monthly payments remain the same over the life of the loan. This predictability can be appealing compared to some other home equity options, such as HELOCs, that often come with variable rates and fluctuating payments. 

It’s important to note the drawbacks to any potential alternative–let’s do that next.

High Interest & Closing Costs

While a cash-out refinance can be a boon if interest rates are low, the opposite is true when interest rates are high! You wouldn’t want to replace your current mortgage with a new one if the terms were less favorable. In addition, be aware that there are closing costs that add to the overall expense of the loan, including application fees, appraisal fees, title insurance, and other expenses.

Foreclosure Risk

Don’t forget that if you struggle to make the new, higher mortgage payments in a cash-out refinance, your home is serving as collateral for the loan! This could put you at a serious risk for foreclosure.

Decreases Your Home Equity

When you take out a cash-out refinance, you’re replacing your previous mortgage with a brand spanking new one. As a result, you’re erasing the equity you built up and starting from scratch. You won’t be able to tap into that equity for quite some time, and if you should sell your home, you will receive much less of a financial benefit.

Longer Closing Times

A cash-out refinance is not a great choice if you need the funds in a timely fashion–closing times tend to be longer than other equity products.

Should I Get a Cash-Out Refinance?

At the end of the day, you’re the only one who can really decide whether an alternative is best-suited for you and your unique situation. And if you have a financial advisor, you should certainly consult with them, too. However, generally speaking, a cash-out refinance may be a good idea if:

• you qualify for better terms (i.e. lower interest rates)

• you need funds for a major expense, such as education costs or a significant life event, and prefer to borrow against your home equity rather than take on other forms of credit

• you want to consolidate high-interest debt, as a cash-out refi could lower your overall interest costs and simplify your debt management

Frequently Asked Questions About Cash-Out Refinance

How Much Are Cash-Out Refinance Closing Costs?

The closing costs for a cash-out refinance can vary widely based on several factors, such as your location, the chosen lender, the loan amount, and the specific terms of your refinance. On average, closing costs for a cash-out refinance (typically) range from 2% to 5% of the total loan amount. But you may also be responsible for some of the following:

• Origination Fees: cover the lender's administrative costs for processing your loan application

• Appraisal Fee: An appraisal of your property is typically required to determine its current value.

• Credit Report Fee: As part of the underwriting process, lenders often charge a fee to pull your credit report.

• Title Search and Title Insurance: cover the cost of researching the property's title history and providing insurance to protect against title issues

• Recording Fees: When your new mortgage is recorded with the county or municipality, there are associated fees.

• Homeowners Insurance: Lenders may require you to prepay a portion of your homeowners insurance as part of the closing costs.

• Property Taxes: Depending on your loan and the timing of your refinance, you may need to pay property taxes upfront.

• Attorney or Escrow Fees: In some states, an attorney or escrow company may be involved in the closing process, and their fees can be included in the closing costs.

• Courier Fees: These fees cover the cost of sending documents between parties involved in the transaction.

How Much Money Can You Get With a Cash-Out Refinance?

The amount of money that you can obtain from a cash-out refinance is dependent on multiple factors, such as the current value of your home, the outstanding balance on your existing mortgage, the loan-to-value (LTV) ratio allowed by your lender, and the specific terms of the refinance.

Most lenders allow a maximum LTV ratio of 80% to 85% for cash-out refinances. This means that the new loan amount, including the cash you receive, cannot exceed 80% to 85% of your home's current appraised value. If you subtract the outstanding balance on your existing mortgage from the maximum loan amount, you should have a decent idea of the “cash out” for which you will be eligible.

Can I Refinance My Home Without Taking Cash Out?

You can refinance your home without taking cash out; such a refinance is commonly referred to as a "rate and term refinance" or a "no cash-out refinance." In a rate and term refinance, the primary goal is to obtain a new mortgage with more favorable terms, such as a lower interest rate or a different loan term, without tapping into your equity.

A More Flexible Way to Tap Into Your Equity

If you’re looking to access your home equity but aren’t sure that a cash-out refinance is the right fit, Unison may offer a smarter path forward. As a platform dedicated to helping homeowners unlock the power of their equity – on their terms – Unison provides a range of innovative solutions designed to meet different financial needs and life stages.

Whether you want to lower your monthly payments, avoid adding interest-heavy debt, or simply explore more flexible options beyond banks and traditional lenders, Unison can help you make the most of your home without giving it up.

Tens of thousands of homeowners have already used Unison’s equity-sharing and lending solutions to renovate, consolidate debt, fund education, or prepare for retirement – all without the stress of one-size-fits-all financing.

Curious what your equity could do for you? Get a free estimate with zero obligation and zero credit impact and explore what’s possible with Unison.

Disclaimer: This content is provided for general informational and educational purposes only and is not intended to serve as financial, investment, legal, tax, or lending advice. The information presented may not apply to your specific situation, and actual outcomes can vary based on individual circumstances, market conditions, and applicable laws. Home equity sharing agreements and loans involve risks, including the potential loss of future home appreciation or other financial implications. Terms, availability, and eligibility for any products mentioned may differ by state, lender, or other factors. We strongly recommend consulting with a qualified financial advisor, attorney, or licensed professional before making any decisions or entering into agreements. Unison Mortgage Corp. is a licensed lender (NMLS ID 2574289); this article may include promotional content related to its services.