Cash-Out Refinance Costs, Rules and Qualifying

1. You apply for a new mortgage that's bigger than what you owe now.
2. The lender checks your home's value, usually with an appraisal, plus your credit and income.
3. You get a Loan Estimate. It's a standard form that shows your rate, payment, and closing costs. Compare it with other lenders' estimates.
4. At closing, the new loan pays off your old mortgage. You get what's left over in cash, minus closing costs if you don't pay them up front.
5. You make one payment on the new loan from then on.

Here's a simple example with made-up numbers. Your home is worth $400,000 and you owe $200,000. You take a new $260,000 mortgage. It pays off the $200,000, and you get about $60,000, minus closing costs.

Compare the rates first. A cash-out refinance changes the rate on your whole mortgage. A home equity loan leaves your current mortgage alone and adds a second, smaller loan.

• If the new rate is higher than your current rate, you'd pay that higher rate on your entire balance. A home equity loan or HELOC might cost less.
• If the new rate is lower, a cash-out refinance can make more sense. You get cash and may lower the rate on what you already owe.

Then compare closing costs. A cash-out refinance usually has higher closing costs because it's a whole new mortgage. In states that tax new mortgages, like Florida and Georgia, that gap can be bigger.

See the full comparison of home equity options.

If you're paying off high-interest credit cards or other loans, a home equity loan or HELOC may turn you down. Lenders compare your monthly debt to your income. That's your debt-to-income ratio, or DTI. Adding a second loan payment on top of your current bills can push that ratio too high.

A cash-out refinance can work differently. The lender can pay off eligible debts directly at closing out of your loan money. Those monthly payments go away the day the loan closes, so the underwriter no longer counts them against you. That can help you qualify for one lower-rate mortgage payment when a second loan would not work.

Ask the lender which of your debts can be paid off this way. Not every debt counts, and the rules vary by loan program.

• Your loan clock resets. A new 30-year loan means 30 more years of payments, even if you had 20 left.
• Closing costs add up. Make sure the cash you're getting is worth what you'll pay to get it.
• Your home equity shrinks. That leaves less cushion if home prices drop or you need to sell.

For most refinances on your main home, federal law gives you until midnight of the third business day after closing to cancel. The clock starts once you've signed, received your Truth in Lending disclosure, and received two copies of your notice of the right to cancel. Saturdays count as business days. Sundays and federal holidays don't.

The catch: a lower monthly payment doesn't always mean you'll pay less. Stretching your mortgage back out to 30 years can add a lot of interest over time. Compare the total cost, not just the payment.