Cash-Out Refinance Calculator

How does a cash-out refinance work?

When a homeowner decides that a cash-out refinance is the best option for their financial needs, the application process is similar to other home loans. As the borrower, you'll choose a lender and apply for the loan. You'll need to meet their lending requirements and the requirements of the loan you're refinancing into.

Cash-out refinance requirements

You'll need enough equity in your home to obtain a cash-out refinance loans. The amount depends on whether you're refinancing into a conventional, FHA or VA loan. You'll also usually need to meet other financial criteria and have a home appraisal completed to assess the property's value. Here's a deeper look into each of these requirements.

Loan-to-value ratio (LTV)

Most lenders will have a maximum of 80% LTV (a minimum of 20% home equity) on conventional and FHA refinance loans. VA refinance loans may increase the LTV ratio to 100%, depending on the borrower's eligibility.

Debt-to-income ratio (DTI)

A cash-out refinance loan typically requires a DTI of 43% or lower, but some lenders may increase this to 50% depending on the borrower’s financial situation.

Credit score

To be approved for a cash-out refinance loan, typically borrowers must have a minimum credit score of 580 for an FHA refinance and 620 for a conventional refinance. Many lenders will not require a minimum credit score for VA refinance loans. Learn more about how to refinance with bad credit.

Proof of financial documentation

You'll be required to show the lender proof of assets and employment/income documentation to obtain a cash-out refinance loan. Here are some examples of financial documents the lender may ask you to provide:

• Paystubs
• Mortgage payment history
• Bank statements

Home appraisal

Cash-out refinance borrowers typically need a home appraisal done on the property. The appraisal costs are included in your closing costs.

Pros and cons of a cash-out refinance

Like all loans, there are pros and cons of obtaining a cash-out refinance loan. Using the money from a cash-out refinance can help you pay for other expenses with the equity you've gained in your home, but you also have to consider your financial situation and the market. If you can lower your mortgage rate or need cash in a hurry, a cash-out refinance may be a good idea. Here are some pros and cons to consider when deciding when to acquire a cash-out refinance:

Benefits

• Access to cash from the equity in your home
• Allows borrowers to consolidate other debt
• Possibility of lowering your monthly mortgage payments or refinancing into a shorter-term loan (15-year vs 30-year)
• Lower interest rates and loan options compared to other types of credit, like a personal loan
• Potential tax deductions depending on how the funds are used

Drawbacks

• Required to pay closing costs on the new loan
• Increased debt on the property loan
• Possibility of increasing your monthly mortgage payments, depending on loan term
• Potential of increasing your loan's repayment term, if you choose to refinance into a longer-term loan
• Potential tax implications that may increase your tax liability