Your home gains equity as your mortgage matures. Equity refers to the home’s value less your mortgage balance owed.

You can gain equity in two ways:

1. The value of your home increases.
2. You pay down your mortgage principal through your scheduled monthly mortgage payments or through additional principal reduction payments. Every time you make a payment on your loan, you gain equity.

A cash-out refi is a type of mortgage refinance that leverages the equity you’ve built over time and gives you cash in exchange for taking on a larger mortgage. In other words - with a cash-out refi - you borrow more than you owe on your mortgage and pocket the difference. You can use the extra cash for any purpose - to pay off Revolving or Installment debt, to Remodel your home, or any other purpose.

Unlike a second mortgage, a cash-out refi doesn’t add another monthly payment – you pay off your old mortgage and replace it with a new mortgage.

For example, let’s say that your original mortgage was $300,000 and you currently owe $240,000 on your home. You would like to take $40,000 cash out to remodel the home.

With a cash-out refi - you would apply for a new mortgage for $280,000 – the $240,000 balance owed on the home plus the $40,000 you want for remodeling. When your new loan closes, the $40,000 cash-out will be wired into your bank account and the old loan will be paid off.

When you refinance, you can do anything you want with the money you take from your equity. You can make repairs on your property, pay off student loan debt, or cover unexpected medical bills. A cashout refi usually gives you access to lower interest rates than credit cards, too.

How Much Can I Cash Out?

The amount you can cash out on your refinance typically depends on your home's value. You'll need to have your home appraised to find out how much you qualify for. In general, lenders will let you draw out up to 80% of your home's value, but this can vary from lender to lender and may depend on your specific circumstances.

One big exception to the 80% rule is a VA loan which lets you take out up to the full amount of your existing equity.

How much can you cash out?