What is the average rate for a cash-out refinance?
As with other kinds of mortgages, interest rates on cash-out refinances tend to fluctuate daily. As of May 2023, the average rate for a cash-out refinance ranges between 5% and 7%, but you may be able to score a better deal by comparing options from several different lenders.
Product | Interest rate | APR |
---|---|---|
15-year fixed-rate | 5.814% | 5.956% |
10-year fixed-rate | 6.107% | 6.355% |
7-year ARM | 6.711% | 7.468% |
5-year ARM | 6.797% | 7.684% |
It's true: cash-out refinance rates are typically higher than their rate-and-term refinance counterparts'. This disparity is because mortgage lenders consider a cash-out refinance relatively higher-risk, since it leaves you with a larger loan balance than you had previously and a smaller equity cushion.
Taking out a larger mortgage to get cash out often means you'll have a higher monthly mortgage payment, even if you managed to secure a lower interest rate. Should you become unable to pay the loan on-time, the lender can put a lien on your home and potentially foreclose and take possession of the home.
Product | Interest Rate | APR |
---|---|---|
20-Year Fixed Rate | 6.82% | 6.88% |
15-Year Fixed Rate | 6.47% | 6.55% |
10-Year Fixed Rate | 6.40% | 6.49% |
5-1 ARM | 6.51% | 7.86% |
Key takeaways
The benefits of a cash-out refinance include access to money at potentially a lower interest rate, plus tax deductions if you itemize. On the down side, a cash-out refinance increases your debt burden and depletes your equity. It could also mean you're paying your mortgage for longer.
No, the proceeds from your cash-out refinance are not taxable. The money you receive from your cash-out refinance is essentially a loan you are taking out against your home's equity. Loan proceeds from a HELOC, home equity loan, cash-out refinance and other types of loans are not considered income.
A home equity line of credit, or HELOC, is typically the most inexpensive way to tap into your home's equity.
Cash-out refinances are generally best for big-ticket costs: Think home renovations or major debt consolidation. Determining whether you qualify: Many cash-out refinance lenders require a credit score of at least 620 and at least 20 percent equity in your home.
Refinancing doesn't necessarily have to affect the equity in your home, but in certain cases it definitely can. Factors that determine the equity in your home include the balance owed on your mortgage and how much your home is worth. The difference between these two figures is your home equity.
Are there closing costs on a cash-out refinance?
You'll pay closing costs for a cash-out refinance, as you would with any refinance. Refinance closing costs are typically 2% to 6% of the loan. That's $4,800 to $14,400 for a $240,000 refi. This can take a big bite out of the cash you'll receive at closing.
Yes, there are options other than refinancing to get equity out of your home. These include home equity loans, home equity lines of credit (HELOCs), reverse mortgages, Sale-Leaseback Agreements, and Home Equity Investments.
Interest rates have held steady since July 2023.
The Fed raised the rate 11 times between March 2022 and July 2023 to combat ongoing inflation. After its December 2023 meeting, the Federal Open Market Committee (FOMC) predicted making three quarter-point cuts by the end of 2024 to lower the federal funds rate to 4.6%.
30-year mortgage rates are currently expected to fall to somewhere between 5.9% and 6.1% in 2024. Instead of waiting for rates to drop, homebuyers should consider buying now and refinancing later to avoid increased competition next year.
The current Bank of America, N.A. prime rate is 8.50% (rate effective as of February 13, 2024).
Expect a cash-out refinance to take 45 to 60 days, but with a little help, you may speed up the processing time. The faster you provide documentation and secure the appraisal, the faster your lender can underwrite and process your loan. It's a team effort to get the cash in hand that you want from your home equity.
Keeping the maximum 80% LTV ratio requirement in mind, you may borrow up to an additional $60,000 with a cash-out refinance. To calculate this, multiply your home's value by 80% ($450,000 x 0.80 = $360,000) and subtract your outstanding loan balance from that amount ($360,000 – $100,000 = $60,000).
Refinance loans are treated like other mortgage loans when it comes to your taxes. You may be able to deduct certain costs, like mortgage interest, but only if you itemize your deductions. If you take the standard deduction (which most filers do), then your mortgage refinance won't affect your taxes one way or another.
A home equity loan could be a good idea if you use the funds to make home improvements or consolidate debt with a lower interest rate. However, a home equity loan is a bad idea if it will overburden your finances or only serves to shift debt around.
DON'T take out excessive equity.
Also keep in mind that a home equity loan or line of credit decreases the amount of equity you have in your home. If you have taken out too much equity and the real estate market drops, you can end up losing all the equity in your home.
Can a home lose equity?
“Equity” is a term that refers to the amount of your home that you own. In most circ*mstances, your home equity increases over time as you make payments on your loan. But if property values fall, you may find yourself with no equity or even negative equity.
Cash-out refinances can have two adverse impacts on your credit score. One is the replacement of old debt with a new loan. Another is that the assumption of a larger loan balance could increase your credit utilization ratio. The credit utilization ratio makes up 30% of your FICO credit score.
Equity is your home's market value minus your mortgage balance. Although it's sometimes called a second mortgage, a home equity loan doesn't affect your mortgage. Your mortgage interest rate, term and payments stay the same—you'll just have another monthly payment.
Legally speaking, there's no limit to how many times you can refinance your mortgage, so you can refinance as often as it makes financial sense for you. Depending on your lender and the type of loan, though, you might encounter a waiting period — also called a seasoning requirement.
The maximum amount a lender will offer you is typically 80% to 85% of your combined loan-to-value (CLTV) ratio, a measure of the difference between the value of your house and how much you are borrowing.
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