Cash-out refinance vs second mortgage
Frequently Asked Questions
Straight answers to the questions we hear most.
It may not be the best choice if current interest rates are significantly higher than your existing rate, if you cannot afford the new monthly payment, if you plan to sell your home in the near future (making it hard to recoup the closing costs), or if you are using the cash for discretionary spending rather than a sound financial goal.
A cash-out refinance replaces your primary mortgage with a new, larger one. A home equity loan (or a Home Equity Line of Credit, HELOC) is a second, separate loan that you take out in addition to your existing first mortgage. A cash-out refi often has a lower interest rate, while a HELOC offers more flexible access to funds.
Most lenders require you to maintain at least 20% equity in your home after the refinance. This means the total loan amount of your new mortgage cannot exceed 80% of your home’s appraised value. Some government loans, like the VA cash-out refinance, may allow you to access up to 100% of your equity.
Like your original mortgage, a cash-out refinance comes with closing costs, which typically range from 2% to 5% of the total loan amount. These fees include an application fee, appraisal fee, origination fees, title insurance, and other third-party charges.
The main risk is that you are putting your home up as collateral. If you cannot make the new, potentially higher, mortgage payments, you could face foreclosure. You are also resetting the clock on your mortgage term, which could mean paying more interest over the long term, and you are reducing the equity you’ve built in your home.
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