A cash-out refinance is a new, larger mortgage that replaces your current home loan and converts your equity into cash. Because it frees up these funds, a cash-out refinance can be a good option to consolidate debt, renovate your home, or cover another big expense.
Here’s what to know about cash-out refinances, qualifying for one, and the best cash-out refinance lenders:
- What is a cash-out refinance?
- Where to get a cash-out refinance
- Cash-out refinance requirements
- How to find the best lender
- Best cash-out refinance lenders
What is a cash-out refinance?
A cash-out refinance is a type of mortgage refinance that lets you convert the equity built up in your home into cash. You take out a new mortgage that’s used to pay off your existing mortgage. The new home loan is typically larger than the balance left on your current one, with the difference converted into a cash payout minus any closing costs and other charges, such as homeowners insurance or real estate taxes.
The new, larger loan would ideally include more favorable repayment terms than you currently enjoy. That means you may be able to lower your monthly mortgage payments, negotiate a lower interest rate, and remove co-borrowers, cosigners, or private mortgage insurance obligations. Plus, because you’re paying off one mortgage with another, you’re not adding another monthly bill.
Where to get a cash-out refinance loan
You can typically get a cash-out refinance from a bank, credit union, online lender, or other financial institution. Depending on which option you choose, terms, rates, and the application process may vary.
Mortgage lenders
Many, if not most, mortgage lenders offer cash-out refinancing. Choosing the right mortgage lender can save you time and money. That is just one reason why shopping around is so important. But it’s also important to understand that mortgage lenders differ from mortgage brokers, who work as an intermediary but do not actually lend money.
On the other hand, a mortgage lender is an individual, an investor, or a mortgage bank or other financial institution that offers (and often underwrites) home loans for a fee. The fee may cover preparing all documents, arranging for a home appraisal and inspection, clearing up title issues, if any, and more.
Banks
It’s common for many homeowners to visit a mortgage lender in person at a bank to handle a cash-out refinance. You can also apply online at many locations.
This lending option may be preferred if you have a long-standing relationship with your bank. If that’s the case, you may qualify to get better rates and terms on your refinance or even have reduced fees and closing costs (which are similar to when you took out your original mortgage).
However, among refinancing lenders, banks may have the highest rates, and it may take longer to finalize your loan.
Credit unions
Because credit unions are nonprofit organizations, they can offer some of the lowest rates on your cash-out refinance. And, since there are about 5,000 credit unions in the U.S., you should have no problem finding one right down the road.
The downside to using a credit union is that you have to be a member to apply, and because they are nonprofit and generally smaller than many banks, they may have fewer loans available. Again, it pays to shop around before finding the best cash-out refinance lender for your situation.
Cash-out refinance requirements
Not all lenders have the same requirements, but generally, a cash-out refinance comes with similar eligibility criteria as a standard mortgage loan. You may need to meet the following requirements:
A 620 credit score
A credit score of 620 or higher is usually required, although some government programs only require a score of 580 or lower. An FHA cash-out refinance, for example, requires a minimum credit score of 500.
If your credit score is lower, you may not qualify for a high amount, and your lender may tack on additional requirements to lower their risk.
At least 20% home equity
To obtain a cash-out refinance, you must have more than 20% equity in your home. Although each lender is different, most allow you to borrow up to 80% of the value of the property. For example, if you have a $450,000 home, the most you could borrow would be $360,000. One exception is a VA loan that lets you take out the full value (100%) of your existing equity.
Low debt-to-income (DTI) ratio
A debt-to-income ratio (DTI) looks at how much you earn versus how much you owe each month. It is shown as a percentage of your gross monthly income that goes toward all your monthly debt, including rent, credit cards, auto loans, and more. A lower DTI is preferred, say in the range of 35%.
Income and employment verification
A stable income is one factor lenders look at to determine if you can make ongoing payments on your cash-out refinance. A reliable source of income also gives lenders the confidence that you won’t default on your loan. You’ll likely need to provide employment verification with pay stubs or tax returns.
Home appraisal
To qualify for a cash-out refinance, lenders require a home appraisal to determine the current value of your home based on a number of criteria, such as your home’s condition, the local market, and similar properties sold in your area. They will establish the amount you qualify for on the appraisal.
Closing costs
Just like when you took out your original mortgage loan, you’ll be required to pay closing costs, which are around 2% to 5% of the mortgage amount. These costs may be paid out of pocket or rolled into your loan. Either way, they add to the total cost of your new loan.
How to find the best cash-out refinance lender
Although you’re able to switch lenders at any time, it’s generally best to first research your cash-out refinance options with your existing lender. But if you decide to switch, keep in mind that restarting paperwork and underwriting could cause delays in the refinance process.
When choosing the best lender for you, also consider these factors:
Experience
Finding a lender with experience with cash-out refinancing, mortgages, loans, and other types of financing is important to ensure the paperwork, underwriting, and all other aspects of the loan are completed correctly and on time. Lenders knowledgeable in these areas can often find rates and terms that an inexperienced lender may not have access to.
Trust and comfortability
While experience speaks volumes, trusting your lender is also important. That’s why many people choose to work with their current bank or credit union when applying for a cash-out refinance. Finances are difficult to talk about but much harder with a stranger. Ensuring your comfort with your lender during the whole process — from start to finish — will make refinancing your current mortgage as painless as possible.
Refinancing with existing bank or lender
Qualifying and applying for your cash-out refinance with your existing bank, credit union, or mortgage lender is preferred by many borrowers. You’ve already established a history of on-time payments and likely have verified checking and savings accounts.
However, although you are a customer, you’ll still need to fill out the required documentation and apply just like anyone else. You may (or may not) get better rates and terms, as well as closing cost rebates or discounts on fees, but the process may not go any faster than if you worked with a new lender.
Best cash-out refinance lenders
The trick to getting a cash-out refinance with more attractive rates and terms than you currently enjoy is finding the “best” cash-out refinance lender to meet your personal needs. Maybe you want a fixed-rate mortgage rather than your current adjustable-rate loan. Perhaps you want to lower your monthly payment by extending your term — or alternatively, pay off your mortgage faster.
We’ve compiled a list of three of the best cash-out refinance lenders based on our proven methodology.
Rocket Mortgage
Rocket Mortgage is owned by Quicken Loans. It offers a fully online mortgage prequalification and application process that you use to apply for your cash-out refinance. However, Quicken Loans actually processes the loan.
Rocket Mortgage is best if you want to lower your monthly payment, shorten your loan, or take a cash payout with a cash-out refinance. It would be best to have a credit score of at least 580.
If you choose to work with Rocket Mortgage, you can roll your closing costs into the loan balance. However, doing so will likely mean a higher loan balance, which means you will pay more interest over your loan term.
Pros & cons
Pros
- You can prequalify and apply online with around-the-clock support as needed.
- Interest rates are very reasonable compared to many other lenders.
- Experienced loan officers are available by phone if desired.
Cons
- If you want to customize your interest rate, Rocket Mortgage requires a credit check, which can affect your credit score temporarily.
- Rocket Mortgage prefers stable employment in a traditional job with a W-2.
- Closing costs range from 2% to 5%, adding to your monthly payment.
loanDepot
loanDepot lets you speak with a loan officer and apply for your cash-out refinance in person at one of their more than 200 national branches or online. After choosing your cash-out refinance, a loanDepot loan officer will submit your loan to underwriting for approval.
loanDepot is probably best if you want fast approval times, are an active-duty military or a veteran, or want to refinance your fixed-rate loan to an adjustable-rate loan. Also, loanDepot could be a good choice because it forgives lender fees and offers appraisal reimbursement for future refinances once you become a customer.
Pros & cons
Pros
- If you prefer face-to-face interaction with a loan officer, you can visit more than 200 branches nationwide.
- LoanDepot states it delivers low rates and can close on your cash-out refinance 50% faster than many of its competitors.
- You can get preapproved for your refinance online.
Cons
- It can be difficult to compare rates online since they’re not prominently advertised, so you may have to contact a loan officer instead.
- Lender could do better to more prominently display fees.
Caliber Home Loans
In 2019, Caliber Home Loans was named a Top 30 Lender by Inside Mortgage Finance. If you want to lower your interest rate or change the terms of your loan, you’re a military member or veteran who wants to refinance, or you’re looking to customize your loan term, Caliber may be a good choice. It’s also worth noting that Caliber has a specially trained team to assist and offer personalized service to the military community.
Pros & cons
Pros
- You can apply for your cash-out refinance through its online portal or by using a mobile app for Android and iPhone.
- You can download loan disclosures, upload your documents online, and track your loan’s progress.
- It has a network of loan consultants available by email, phone, or text.
Cons
- It lacks transparency of fees and other costs online, which can be problematic if you’re comparing lenders.
- You may need a minimum credit score of 620 to qualify.
- It charges an origination fee, which some competitors have eliminated.
No matter which lender you choose, a cash-out refinance has several key benefits — as well as a few glaring drawbacks. You can get the cash you need without adding a new monthly payment, but you also eat into the equity you’ve worked so hard to build up in your home.
Methodology
Credible evaluated loan and lender data points in seven categories to identify “best companies” for mortgages. These categories included interest rates, fees, availability of repayment terms and discounts, eligibility requirements, minimum down payment, and the level of customer service provided. Because every lender has its own system for evaluating borrowers, the best loan or lender will depend on an individual’s unique circumstances, the loan features that are most important to them, and the interest rate and terms they qualify for.