When to Acquire A Cash-Out Refinance and Why

Considering a cash-out refinance? It’s all about timing. The best time to do a cash-out refinance is when interest rates are low, your credit profile is strong, and you have a specific need for the money. 

According to Jonathan Lee, Zillow Home Loans Senior Director, “Fast-rising home values make cash-out refinances a great option, allowing homeowners to tap into the increased equity of their home and reinvest their savings in other areas, like paying down high-interest debt, funding tuition or completing a home improvement project.”

What is a cash-out refi?

A cash-out refinance is when a homeowner refinances their existing home loan, which replaces it with a new loan, while taking out some cash along the way. The cash draws from existing equity in the property. Cash-out refinances are popular with homeowners who want to avoid the high interest rates of credit cards or personal loans, yet need cash in hand to meet their personal financial goals.

Cash-out refinances are just one of many refinancing options available, including rate-and-term, no closing cost and streamline refinance.

When to cash-out refinance

Timing is paramount when doing a cash-out refinance. The best time to take advantage of a cash-out refinance is when interest rates are low, your credit score is high and the cash is financially necessary. It’s also important to ensure that you can comfortably cover the increased monthly payments.

When you need cash

Since a cash-out refinance typically results in a higher monthly mortgage payment, it only makes sense to do a cash-out refinance when you need liquidity. There are plenty of reasons people choose to pursue a cash-out refinance: to complete home renovations, consolidate high-interest debt, pay for large life events or open a business.

When interest rates are low

A cash-out refinance results in a new home loan, which means you’ll be shopping around for a new interest rate. Many homeowners took advantage of the historically low interest rates of 2020, 2021 and early 2022. Check today’s refinance rates.

When your credit score is high

The better your credit score, the better the interest rate you’ll get. When your credit score is at its highest, it might be a good time to consider refinancing.

When you have enough home equity to qualify

Typically, you’ll need at least 20% equity in your home after cashing out. If you have a lot of equity in your home, it may be the right time to pursue a cash-out refinance.

When a cash-out refinance is the cheapest source of cash

A cash-out refinance is often a more affordable way to access the cash you need. Unlike credit cards and personal loans, which are unsecured, a cash-out refinance leverages the equity you have on your home, allowing you to access lower interest rates and fees. As you start your search, be sure to compare with other options, such as a personal loan, HELOC or home equity line of credit.

Work with a refinance lender to see whether a cash-out refinance makes financial sense for you.

Reasons for cash-out refinance

There are many reasons people decide to pursue a cash-out refinance. Once you have that cash in hand, you can use it however you see fit. Here are some of the most common use cases for taking cash out:

• Use a cash-out refinance to pay off high-interest debt or bills
• Complete home renovations or improvements
• Boost available savings for unexpected life events
• Buy a car or other vehicle
• Pay for higher education
• Make other investments

Benefits of a cash-out refinance

The key benefit of a cash-out refinance for most homeowners is the ability to use the equity they’ve earned in their home without having to sell. Of course, if you can also refinance into a lower interest rate, you may be able to keep more money in your pocket over the life of the loan.

Quickly access your home equity

A cash-out refinance gives you access to your equity quickly (without selling your house), typically within 30-45 days, depending mostly on how long underwriting takes.

Borrow money more affordably

Rates are usually lower than credit cards or personal loans, making a cash-out refinance one of the more economical ways to borrow money.

Avoid income tax on the cash lump sum

The funds you get from a cash-out refinance isn’t considered income, so you won’t pay income tax on it. Instead, it’s considered a loan, but there are limitations to claiming tax deductions on the loan. Work with a tax professional to ensure deductions are possible based on your use of the cash.

Fund home improvements for less

Cash-out refinances generally offer lower interest rates compared to other home improvement funding options like HELOC or home equity loans. Plus, using equity to renovate may unlock increased equity after your project is complete.

Should I do a cash-out refinance?

A cash-out refinance can be a smart move when all the details align: You get a good interest rate, you can easily make your new monthly payments, you have enough equity, and you have an urgent need for the money. Popular uses include big home improvement projects or debt consolidation.