Cash-out refinance pros and cons.

A cash-out refinance can be one of the cheapest ways to borrow a large amount, but it resets your whole mortgage. Here's the honest list.

Pros

• Usually a lower rate than unsecured debt. Mortgage rates are typically far below credit-card and personal-loan rates because the loan is secured by your home.
• A large lump sum. Up to 80% of your home's value on most primary-home loans, and up to 100% for eligible VA borrowers.
• One payment. You replace your mortgage instead of adding a second loan.
• Fixed-rate options. You can lock a fixed rate for 15 to 30 years, unlike most HELOCs.
• No mortgage insurance on conventional loans, since they're capped at 80%.
• Possible tax benefit if the cash is used to substantially improve the home — see cash-out refinance taxes.
• Can drop FHA mortgage insurance by refinancing an FHA loan into a conventional cash-out at 80% or less.

Cons

• Closing costs. Expect costs similar to a purchase loan. A HELOC usually costs less to open.
• You give up your current rate. The new rate applies to the entire balance. If your current rate is well below today's, that can cost more than the cash is worth.
• Higher pricing than a no-cash refinance, because Fannie Mae and Freddie Mac add cash-out pricing adjustments.
• A bigger balance and possibly a longer term. Stretching debt over 30 years can mean more total interest even at a lower rate.
• Your home is the collateral. Turning credit-card debt into mortgage debt means missed payments put the home at risk.
• Waiting periods — conventional loans need a 12-month-old mortgage, and FHA needs 12 months of living in the home.

A quick test: the blended rate

If you're comparing a cash-out with keeping your mortgage and adding a second loan, compare the blended rate:

1. Multiply your current balance by its rate, and the new second loan by its rate.
2. Add them and divide by the combined balance.
3. If that blended rate is lower than the cash-out rate, keeping your first mortgage is probably cheaper.

Example: $250,000 at 3.5% plus a $100,000 home equity loan at 8.5% = a blended rate of about 4.93%. A cash-out at 6.75% on $350,000 would cost more each year in interest, so the second loan wins here. If your current rate were 6.5%, the cash-out would likely win.

Who it usually works for

• Homeowners whose current rate is close to today's rates
• People consolidating high-interest debt who will stop running the balances back up
• Borrowers who want a fixed rate rather than a variable HELOC
• Investors pulling equity to buy another property — see DSCR cash-out

Who should think twice

• Anyone with a very low existing rate who only needs a modest amount
• Anyone planning to sell within a couple of years, before the closing costs pay off
• Anyone who might struggle with a larger payment

Compare all three options in cash-out refinance vs. home equity loan and cash-out vs. HELOC, or estimate your proceeds with the calculator.