What Is Cash Out Refinance?

Cash out refinancing is a loan that allows you to use the equity in your home to pay off other debts, or to spend on home improvements.

What Is Cash Out Refinancing For?

Cash out refinancing can be used in many ways:

To pay off high-interest debt. The most common purpose of cash-out refinancing is to get out of a high-interest mortgage and take the money you save on interest payments and use it for other financial goals.

To pay off credit card debt. If you have a lot of credit card debt, paying it off with a cash-out refinance may be cheaper than paying it down slowly with monthly payments. A cash-out refinance can also help you consolidate small balances on several cards into one larger balance at lower rates.

To make home improvements. You can use the equity in your home to pay for projects such as installing new windows or replacing an old roof — things that would otherwise cost thousands of dollars more than if you paid for them with cash upfront.

To buy another house or investment property. You can use the proceeds from your current house’s sale as part of the down payment for a new home or a rental property. If you’re planning to move out of state, the proceeds from a cash out refinance can help you buy a house that is more expensive than your current one — allowing you to pay off your existing mortgage balance and still have enough for other expenses related to the move.

What Are Cash Out Refinance Requirements?

A cash out refinance is different from a regular refinance, because you’re not just refinancing your existing mortgage. You are actually taking out a new loan that requires its own set of requirements and qualifications, including:

  • The new loan amount must be higher than your current mortgage balance.
  • Your total debt-to-income ratio (including the new mortgage and any other debts you have) cannot exceed 45%.
  • Your credit score must be at least 640 to qualify for an FHA cash-out refinance.

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