Cash Out Refinancing

Cash out refinancing allows you to swap your current mortgage for a new one and take out some cash from your home’s equity. This equity is the difference between what your home is worth now and what you still owe on your mortgage.

With this financial strategy, you get a lump sum of cash that you can use for various purposes, including a home renovation project.

How Cash Out Refinancing Works

Cash out refinancing lets you replace your current mortgage with a new one that’s bigger than what you owe. The extra amount you get is cash that you can use for whatever you need—like home renovations, paying off debt, or even funding a big purchase.

Here’s a quick example:

Let’s say you bought your home for $400,000 and, over the years, you’ve paid down your mortgage, so you now only owe $300,000. Thanks to the housing market, your home is now worth $450,000. 

With cash-out refinancing, you could take out a new mortgage for $350,000, which is a larger amount than what you currently owe on your old mortgage. You’d use $300,000 to pay off your old mortgage, and that leaves you with $50,000 in cash to spend on your remodeling project or whatever you need.

How to Qualify for Cash Out Refinancing

To qualify for cash-out refinancing, you usually need to meet a few key requirements:

• Equity: You should have at least 20% equity in your home. For example, if your home is worth $400,000, your mortgage shouldn’t be more than $320,000.
• Credit Score: Most conventional loans want a score of at least 620, but FHA loans can go as low as 580. A higher score can get you better rates. 
• Debt-to-Income (DTI) Ratio: Aim for a DTI of 43% or less. This means no more than 43% of your income should go to debt payments.
• Loan-to-Value (LTV) Ratio: Lenders typically want an LTV of 80% or less to ensure you have enough equity. 
• Income Verification: You’ll need to show proof of income, such as pay stubs or tax returns.
• Home Appraisal: A new appraisal is usually needed to figure out your home’s current value.
• Seasoning: For conventional loans, most lenders want you to have owned your home for 12 months before you can refinance. This is known as the seasoning requirement.

Learn more on how to qualify for a renovation loan.

Pros and Cons of Cash Out Refinancing

Pros

• Get Cash in Hand: You can tap into your home’s equity and get a nice chunk of cash for things like renovations or consolidating debt.
• Lower Interest Rates: You could save some money because the rates for cash out refinancing are usually lower than what you’d find with credit cards or personal loans.
• Stable Payments: If you go for a fixed-rate mortgage, your monthly payments won’t change, so it’s easier to budget.
• Boost Your Credit Score: Using cash to pay off high-interest debt can help your credit score by reducing the amount of available credit you’re using.
• Possible Tax Benefits: If you use the cash for home improvements, you might be able to deduct the interest on your taxes.

Cons

• More Debt: You’ll be taking out a bigger loan, which means more debt and potentially higher monthly payments.
• Longer Loan Terms: Refinancing resets your mortgage term, which could mean it takes longer to pay off your home.
• Closing Costs: Like your original mortgage, cash-out refinancing comes with closing costs, which can add to your expenses.
• Risk of Losing Your Home: Since your home is collateral, if you can’t keep up with payments, you risk foreclosure.

When Cash Out Refinancing Makes Sense (and When It Doesn’t)

In today’s high-rate environment, figuring out whether cash-out refinancing is right for you can be tricky. 

For example, if you’ve secured a first mortgage at a lower rate of 3-4%, refinancing to a new mortgage at a higher rate of 7% might not sound appealing. Instead, you could consider a RenoFi loan, like the RenoFi Home Equity Line of Credit (HELOC). This way, you can access your home’s equity without giving up your low rate.

On the flip side, if you’ve got a higher-rate mortgage and rates drop, pursuing a cash-out refinance could be a smart move. It can help you snag a lower rate, free up some cash, and maybe even lower your monthly payments.

RenoFi Refi: The Superior Cash Out Refinancing for Renovations

Although a traditional cash out refinance offers some amazing benefits, you’ll need a good chunk of equity for it to really make sense. This requirement can be a bit of a challenge, especially if you haven’t built up enough equity yet.

The good news is there’s an alternative to traditional cash out refinancing – a better alternative, in fact! It’s the RenoFi cash out refinance, or RenoFi Refi for short.

If you’re looking to tackle a major home renovation project, the RenoFi Refi lets you roll your existing mortgage into a new loan that includes extra funds for your remodel. This new, larger loan is based on what your home is expected to be worth after the renovations.

Learn how RenoFi Refi differs from a traditional cash out refinancing.

An Example of Traditional Cash Out Refinancing vs RenoFi Refi

Here’s a quick example of how traditional cash-out refinancing stacks up against the RenoFi Refi when it comes to accessing your home’s equity for renovations.

Let’s assume your home is currently valued at $400,000, and you still owe $300,000. Here’s how much cash you can get using a traditional cash out refinancing versus a RenoFi Refi.

Traditional Cash-Out Refinance

• Current Home Value: $400,000
• Outstanding Mortgage Balance: $300,000
• Maximum Loan Amount: You can typically borrow up to 80% of your home’s current value.
• Calculation: (400,000 × 80%) − 300,000 = 20,000
• Cash Available: You’d get $20,000 in cash.

RenoFi Refi

Now, let’s look at the RenoFi Refi, which lets you tap into the future value of your home after renovations.

• Projected Home Value After Renovation: $650,000 (calculated using a RenoFi appraisal)
• Outstanding Mortgage Balance: $300,000
• Calculation: (650,000× 80%) − 300,000 = 220,000
• Cash Available: You can access $220,000 in cash!

As you can see, the RenoFi Refi gives you a much bigger cash-out amount, which makes it a fantastic option for funding your renovation dreams. It’s a smart way to unlock your home’s hidden equity.

Read our guide to know if cash out refinancing is a good idea.

Alternatives to Cash Out Refinancing

Home Equity Loan

A home equity loan lets you take out a second mortgage, but instead of refinancing everything, you’re just borrowing against the part of your home that you already own. You get a lump sum of cash upfront and then pay it back with a fixed interest rate over time.

Pros:

• Your payments are predictable since the interest rate stays the same
• Your existing mortgage remains untouched

Cons:

• It adds a second monthly payment on top of your current mortgage

Home Equity Line of Credit (HELOC)

A HELOC gives you a revolving line of credit that’s backed by the equity in your home. This means you can borrow against the value of your home as needed, similar to how you would use a credit card. You can borrow as much or as little as you need, whenever you need it, up to a certain limit during the draw period.

Pros:

• You only pay interest on what you actually borrow
• During the draw period, you can choose to make interest-only payments

Cons:

• The interest rate can go up, so your payments might change
• It’s easy to borrow more than you originally planned

FHA 203(k) Loans

An FHA 203(k) loan is a government-backed loan that helps you buy and renovate a fixer-upper in one transaction. This option rolls the cost of the home and the renovations into a single mortgage, which can be super convenient.

Pros:

• Lower down payment requirements
• More lenient credit standards make it easier to qualify

Cons:

• The paperwork can be a bit much
• You’ll have to follow strict guidelines on how the money is used for renovations

Personal Loan

Using a personal loan for renovation means borrowing money without using your home as collateral. With this option, you get a fixed amount of cash upfront and then pay it back over time with fixed monthly payments.

Pros:

• No risk to your home
• Usually quick to get

Cons:

• The interest rate is generally higher than what you’d get with a home equity loan
• You can’t borrow as much

See more pros and cons of using a personal loan for renovations.

RenoFi Renovation Loan Options Without Refinancing

Refinancing isn’t always the smartest thing to do when paying for renovations. After all, refinancing usually means you’ll be stuck paying interest for many more years. 

If that doesn’t sound appealing, check out these two fantastic RenoFi renovation loan options that don’t require refinancing:

RenoFi Home Equity Loan

The RenoFi Home Equity Loan is a great choice if you want a straightforward way to fund your renovation. This fixed-rate loan lets you borrow against your home’s value after renovations, meaning you can access more cash than with traditional loans. Plus, you don’t need to refinance your existing mortgage.

• Borrowing Power: You can tap into up to 90% of your home’s post-renovation value.
• No Pre-Payment Penalty: You won’t face extra fees if you pay off the loan early.
• Term: You can choose a repayment period of up to 20 years.

See how home equity loans compare to cash out refinancing.

RenoFi HELOC

If you prefer a renovation loan that lets you take out cash as you need it, up to your credit limit, the RenoFi HELOC might be the way to go. Unlike traditional HELOCs, this option offers both variable and fixed interest rates, so you can choose what works best for you.

• Borrowing Power: You can tap into up to 90% of your home’s post-renovation value.
• Full Amount Available at Closing: If you prefer, you can access the entire loan amount in one go.
• Interest-Only Payments: During the draw period, you can choose to pay only the interest on what you borrow to keep your monthly payments lower.

See how to choose between HELOC and cash out refinance.

Benefits of RenoFi

Indeed, you can opt for traditional home equity loans or HELOCs when paying for renovations, but they simply don’t match the borrowing power available with RenoFi. Take a traditional 90% LTV HELOC, for example—it might seem like a solid choice for funding a home renovation, but it often falls short when your existing equity isn’t enough to cover everything you want to do. That’s where RenoFi loans shine – they factor in your home’s After Renovation Value to give you more equity to work with.

For instance, let’s say your home is currently worth $500,000, and you still owe $400,000 on your mortgage. You’re planning some renovations and think your home’s value will jump to around $640,000 afterward. Right now, your loan-to-value ratio (LTV) is 80%, which means you basically can’t borrow anything for your renovation. However, with a RenoFi loan, you could go up to 150% LTV or 90% LTV using that after-renovation value.

In this example, a regular home equity loan would leave you with $0 in borrowing power, but a RenoFi loan could let you borrow up to $176,000, thanks to your home’s new value after renovations!

If you’re considering a home renovation, RenoFi is hands down the smartest way to finance it.

RenoFi Can Help Fund Your Home Renovations

When paying for renovations, traditional cash out refinancing might be a good choice if you’re looking to lock in favorable mortgage rates. However, it might not make much financial sense if you don’t already have enough equity in your home—unless you’re using RenoFi Refi (RenoFi’s cash-out refinance option).

And even if the idea of refinancing doesn’t sit well with you, you can explore other RenoFi loan options that let you access your home’s equity without the long-term commitment of a traditional refinance. If you’re considering a home equity loan or a HELOC, RenoFi offers flexible options to fund your renovation projects while staying true to your financial goals.

Additionally, our RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage. Contact us today to learn more about how RenoFi can help you finance your dream renovation.