Today’s cash-out refinance rates
Mortgage rates are a little higher for cash-out refinancing.
If you want to tap your home equity when you refinance, you can typically expect your rate to be about 0.125-0.25% higher than ‘standard’ refi rates.
The good news is, today’s rates are at historic lows. So even with a small interest rate bump, cashing out is still affordable for many homeowners. And, by taking the right steps, you can find your lowest rate when you refinance. Here’s how to do that.
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Are refinance rates higher with cash-out?
The short answer is, yes. You should expect to pay a slightly higher interest rate on a cash-out refinance than you would for a no-cash-out refinance. That’s because lenders consider cash-out loans to be higher risk.
“Fannie Mae and Freddie Mac insure the majority of mortgages done in the United States. These entities follow a risk-based pricing model. They have deemed that a cash-out refinance carries more risk than a rate and term refinance and have instituted adjustments to the rate to compensate for that,” says Ryan Leahy, sales manager at Mortgage Network.
Remember that when you use a cash-out refinance, your new loan amount is larger than your old mortgage amount. And when someone borrows more money, there’s a higher risk of the loan defaulting.
To compensate for that risk, mortgage lenders bump up the interest rate by a small amount, which means you will pay more over the life of the loan.
How much higher are cash-out refinance rates?
The good news is that interest rates for cash-out refinances are only marginally higher than ‘standard’ refinances. Per Leahy, mortgage rates are usually between 0.125% and 0.25% higher on a cash-out refinance versus a rate and term refinance.
“Typically, the more equity you leave in your home after the cash-out refi, the less of a change there is an interest rate,” he says.
Cash-out refinance rates are typically 0.125% to 0.25% higher than rates for a comparable, no-cash-out refinance.
Nicole Rueth, senior vice president for Fairway Independent Mortgage, notes that the difference or ‘spread’ between rates varies depending on the type of loan you have.
“An FHA loan does not have a risk adjuster between purchases and refinances, so the rate would probably remain the same based on your loan-to-value (LTV) ratio and credit score,” Rueth says.
On the other hand, she points out, “For a jumbo loan, each jumbo aggregator has its own guidelines and risk adjustments and will adjust pricing for a refi anywhere from 0.125% to 0.25%.”
For higher-risk loans like multiunit investments or low credit scores, mortgage rates on a cash-out refinance can sometimes increase by as much as 0.625%.
Since cash-out refinance rates vary so much by mortgage program and by lender, you’ll want to be extra vigilant when shopping for this type of loan. Comparison shopping could save you thousands (even tens of thousands) in the long run.
How your cash-out refinance rate is determined
The interest rate on a cash-out refi is calculated by taking a baseline interest rate for a rate-and-term refinance and then adding any adjustments to that rate.
“These adjustments are tiered and take into account a borrower’s credit score and loan-to-value ratio (LTV). Having a low LTV and a high credit score will allow the rate adjustment to be minimal,” explains Leahy.
The best cash-out refinances rates typically go to borrowers with:
- Credit scores above 740
- More than 20% equity in their home after taking cash out
- A low debt-to-income ratio (DTI)
Keep in mind that your loan-to-value ratio will be calculated based on your new loan amount and a newly appraised home value. (Your lender will order a new appraisal when you apply for a cash-out refinance.)
For example, say your home appraises for $450,000 and your current mortgage loan balance is $250,000.
The maximum LTV for most cash-out refinance loans is 80 percent. That means the maximum amount for your new home loan would be $360,000 (80% of $450,000).
After paying off your existing loan balance ($250,000), that leaves you with a maximum cash-back amount of $110,000, minus upfront closing costs.
But you don’t have to take the maximum cash-back allowed.
For instance, if you take only $50,000 cash-back, your new mortgage amount would be $300,000. That leaves you with a loan-to-value ratio of about 67 percent — far lower than the maximum 80 percent threshold. In this case, you’d likely get a lower interest rate.
How to lower your cash-out refinance rate
If you take cash out when you refinance, your mortgage interest rate will be higher. There’s no way around that. But there are steps you can take to ensure you get the best rate possible.
1. Improve your credit report and score
“The best rates are given to the highest tier credit scores, which means over 740 for a conventional loan, over 760 for a jumbo loan, and over 660 for an FHA loan — which is why maintaining good credit is so important,” Rueth says.
Before refinancing, you can work on improving your credit score by paying down your debts, paying bills on time, and not opening too many lines of credit or credit accounts. It also helps to check your free credit reports and resolve any errors you see there.
2. Consider discount points
Another way to get a lower-rate loan is by purchasing discount points. One discount point costs 1% of your loan amount and typically lowers your interest rate by about 0.25%.
“If you are willing to pay a portion of a point at closing, you may be able to achieve the exact same rate as if you had opted for a rate and term refinance or potentially receive an even lower rate than that,” suggests Leahy.
3. Take less cash out
There are other ways to lower your refinance rate, too.
“If you opt to take out a bit less cash at closing and work ahead of time to lower your LTV ratio, you can get a much better rate for the long-term,” recommends Seth Feinman, vice president of Silver Fin Capital Group LLC.
“Speak with a mortgage professional about all the different ways to structure your refi to optimize your cash out and best interest rate options for your particular scenario at the same time,” he suggests.
Can my rate increase with a cash-out refinance?
If you have an ultra-low interest rate on your current loan, be aware that rates may have increased since you last bought or refinanced. If you refinance in a higher-rate environment, there’s a chance your new rate and mortgage payment could actually be higher than your old one.
In that case, you might want to consider other options.
Home equity lines of credit
“As rates creep up over time and the need for pulling equity out of a home comes up, a borrower should consider pursuing a home equity line of credit to preserve the great rate that they have on their mortgage,” recommends Leahy.
A home equity line of credit (HELOC) can provide a flexible line of credit that you won’t have to pay for until you need it. And while interest rates on HELOCs can be higher than current mortgage rates, you only pay interest on the amount you borrow — not on your full mortgage balance, like you would with a cash-out refi.
However, HELOCs can also be a bit riskier, says Rueth. “Their rates are tied to bank rates, and once interest rates start rising, they will go up with the market rates. That can put a homeowner at risk of not being able to pay off that loan or make their payments,” she explains.
“I tell a lot of my clients that deciding on a HELOC or a cash-out refi will depend on your current rate, the amount you want to pull out, and how you are paid. A salaried W-2 employee might not be able to budget the additional payments if HELOC rates go up versus someone who earns a variable pay and can make swift payments to drop the HELOC loan balance.”
Home equity loans
Another alternative to a cash-out mortgage refinance is a home equity loan.
Like a HELOC, a home equity loan is a second mortgage. You’re still borrowing against the value of your home, but you can leave your current home loan — with its low interest rate — untouched.
Unlike HELOCs, though, home equity loans typically have fixed rates. This removes the risk of a higher monthly payment later on.
How to choose the right home equity product
The right choice for you will depend on your current mortgage and what you plan to use the money for.
If you want to pay off high-interest debt like credit cards or personal loans, for example, it often makes sense to finance that kind of debt on your mortgage, notes Feinman.
“Rates are still at all-time low levels,” he says, “so why not maximize that benefit and pay off higher-rate debt that also has no tax benefits the way mortgage debt does?”
But if your existing mortgage is nearing the end of its loan term, a refinance likely won’t make sense. Remember that cash-out refinancing restarts your loan at day one. So if you’re close to having your home paid off, a home equity loan or HELOC could be a better choice.
A loan officer can walk you through all your options and help you make the right decision based on your financial situation.
Is cash-out refinancing worth it?
A cash-out refi may be be worth it, even if your interest rate will be a touch higher.
“The best candidate for a cash-out refinance is someone who has a higher rate on their home than current market rates and a need for cash,” Leahy advises.
“The cash can be used for a variety of reasons, including home improvements, debt consolidation, funding a down payment on a vacation home or investment property, or putting a child through school.”
With rates remaining near record lows, and with the average homeowner gaining over $30,000 in equity over the past year alone, now is an ideal time to tap into this extra cash and capitalize on cheap financing.
A cash-out refi may not be a wise decision, however, if you plan to sell your home and move in the near future, lack job stability, or will see your fixed interest rate jump higher than you are comfortable with. Talk with an experienced lending professional and explore your loan options.