Is cash-out refinancing worth it?

The current high interest rate environment, coupled with elevated home prices, has a growing number of Americans turning away from making new home purchases. But even if you're not ready to sell your home and move somewhere new, homeowners can still benefit from the market today.

One way to tap into the value of your home is through a cash-out refinance. It could be useful for accessing a large amount of cash — especially if your other options carry much higher interest rates — but it also comes with added fees and could potentially increase the amount you pay on your mortgage over the long term.

To get started, compare refinance rates you may qualify for here now.

What is cash-out refinancing?

When you complete a cash-out refinance, you take out a new mortgage that's worth more than the amount you currently owe on your home. You then use that loan to pay off your initial one. When you close on the new loan, you'll get the difference in value as cash.

While you can technically use that cash for whatever you want, it's generally financially savvy to use it to put value back into your home — through a renovation or repairs, for example — or for paying down existing debt with much higher interest rates.

Is a cash-out refinance worth it?

If you have owned your home for a while and already have a high interest rate, a cash-out refinance could be a good way to access a lump sum and potentially lower the rate you pay on your mortgage.

If you're considering refinancing today, look for options that have a lower interest rate than what you currently pay. Depending on your credit score, location and other details in your application, you may be able to score an interest rate of 6%-7% APR or even lower.

A cash-out refinance may be especially worth it if you're in an area where home prices have gone up, because this gives you more equity in your home, and more borrowing potential. For example, say you took an initial $400,000 mortgage when you bought your home. Today, you still owe $200,000, but your home's value has risen to $500,000. Lenders typically let you borrow up to 80% of your home's current value. In this case, that means you may be able to take out a loan worth up to $400,000 — and receive $200,000 in cash (since you still owe the addition $200,000).

There are cases when a cash-out refinance may not be worth it for you, though.

For example, if you locked in a low interest rate during the pandemic-era housing boom, you may not want to let go of that low rate to refinance. Your new interest rate could be substantially higher today, and result in you paying more in interest payments over the lifetime of the loan.

Compared to other borrowing options, cash-out refinancing may also cost you a significant amount in closing costs and other fees. Make sure you speak with your lender about the complete terms of your new loan before you sign.  

Compares today's top refinance rates here to see if it's right for you.

Alternatives to cash-out refinancing

If you're not sure whether a cash-out refinance is the right move for you, there are other ways you can access funds at low rates using the value you've built in your home. Here are some options to consider.

Home equity loans

Home equity loans, like cash-out refinancing, let you access a lump sum of money based on the equity you've built in your home. However, this type of loan doesn't require you to change anything about your existing mortgage — it's a new loan, and sometimes referred to as a second mortgage.

Home equity loans also allow you to tap into around 80%-85% of your home's value, and generally carry fixed interest rates which are similar but may be slightly higher than refinance rates today.

HELOCs

Home equity lines of credit (HELOCs) are another way to access the value you've built up in your home, but they are a bit different. When you apply for a HELOC, you'll get approved for a line of credit. You can borrow up to the limit you're approved for, but you don't have to use it all. Then, you'll pay back only the amount you actually borrow at a variable interest rate.

Home equity loans and HELOCs are best used for home renovations, since you may be able to deduct the interest you pay when you file during tax season. 

Learn more about today's home equity rates here.

The bottom line

Cash-out refinancing can be a good option for tapping into your home equity. Before you refinance your existing mortgage though, make sure the rate you're refinancing is lower than your existing mortgage and that you can afford your new monthly payments over the lifetime of the loan. Depending on how you're planning to use the money you borrow, it could also be worth considering alternatives, like home equity loans and HELOCs, which may offer better loan terms and tax deductions over time.