What is a cash out refinance, and when is it the right tool?

How it works

The new loan pays off the old balance, closing costs, and hands you the remainder. Lenders typically limit the total to a percentage of the home's appraised value, and cash out pricing runs slightly above a rate and term refinance.

When it fits

It fits when the money does durable work: a renovation that adds real value, retiring high rate debt with a written plan not to rebuild it, or funding an opportunity you have thought carefully about.

It fits poorly when the underlying pattern has not changed. Converting revolving debt into your mortgage without changing the habit turns a short term problem into a thirty year one, secured by your home.

The comparison to make

If your existing rate is well below today's market, replacing the entire mortgage to access equity can be expensive. A home equity line may keep the first mortgage intact and cost far less overall.