If you’ve owned your home for several years, there’s a good chance you’ve built up a significant amount of equity.

Maybe your home has increased in value. Maybe you’ve paid down a substantial portion of your mortgage. For many Michigan homeowners, it’s a combination of both.

That equity is part of your net worth, but most of it is tied up in your home. A cash out refinance is one way to access some of that equity without selling the property.

Homeowners may use the money to consolidate high-interest debt, remodel their home, pay for a major expense, purchase another property, or simply create additional financial flexibility.

But a cash out refinance is not automatically the best way to access your equity.

If you currently have a low mortgage rate, replacing your entire first mortgage with a new loan at today’s rates could be expensive. In that situation, a home equity loan or HELOC may deserve serious consideration.

That’s why I think the better question isn’t simply:

“Can I take cash out of my house?”

It’s:

“What is the smartest and most cost-effective way to access my equity?”

Let’s look at how a cash out refinance works, how much you may be able to borrow, and how it compares with your other options.

What Is a Cash Out Refinance?

A cash out refinance replaces your existing mortgage with a new, larger mortgage.

The new loan pays off your existing mortgage, and after applicable closing costs and other amounts due, you receive the remaining proceeds in cash.

Here’s a simple example.

Let’s say your home is worth $400,000 and you currently owe $200,000 on your mortgage.

You have approximately:

$400,000 home value – $200,000 mortgage balance = $200,000 in home equity

That does not necessarily mean you can borrow the entire $200,000.

Mortgage programs generally require you to leave a certain amount of equity in the property after completing a cash out refinance.

If your loan program allowed you to refinance up to 80% of the home’s value, the numbers could look like this:

Home value: $400,000
Maximum loan at 80% LTV: $320,000
Existing mortgage balance: $200,000
Potential gross cash available: $120,000

Your actual proceeds would be affected by closing costs, prepaid items, any additional liens being paid off and the final loan amount for which you qualify.

This is why understanding loan-to-value ratio, commonly called LTV, is so important when considering a cash out refinance.

What Is Home Equity?

Your home equity is essentially the difference between what your home is worth and what you owe against it.

If your house is worth $400,000 and your mortgage balance is $200,000, you have approximately $200,000 in equity.

Your equity can increase in two primary ways:

1. You pay down your mortgage balance.
2. Your home’s market value increases.

Over time, both can happen simultaneously.

For homeowners who purchased several years ago, the amount of equity available today can sometimes be surprising.

A current appraisal or other acceptable valuation may be needed during the refinance process to establish the property’s value.

How Much Cash Can You Take Out of Your House?

This is usually one of the first questions homeowners ask me.

The answer depends on several factors, including:

• Your home’s current value
• Your existing mortgage balance
• The type of mortgage you’re using
• Your credit profile
• Your income and employment
• Your debt-to-income ratio
• Whether the home is your primary residence, second home or investment property
• Program-specific loan-to-value requirements

Different mortgage programs have different maximum LTV requirements for cash out refinances.

That means two homeowners with the exact same amount of equity could qualify to access different amounts depending on their circumstances and the loan program being used.

This is also why I wouldn’t recommend deciding how much money you want to take out before looking at the complete mortgage.

Taking the maximum amount available isn’t always the best financial decision.

Sometimes taking less cash results in a better loan structure, lower payment or more favorable pricing.

We can run several scenarios and compare them before you decide.

What Can You Use Cash Out Refinance Funds For?

One of the advantages of a cash out refinance is flexibility.

Homeowners commonly use the proceeds for things such as:

• Paying off high-interest credit cards
• Consolidating personal loans
• Home improvements or renovations
• College or education expenses
• Major medical or life expenses
• Purchasing an investment property
• Funding a large planned expense
• Creating additional cash reserves
• Paying off other liens or obligations

The important thing is to look at what you’re paying off and what you’re replacing it with.

For example, using mortgage proceeds to eliminate credit-card debt carrying a very high interest rate could substantially reduce monthly debt payments.

But you’re also potentially converting unsecured debt into debt secured by your home and may be extending repayment over a much longer period.

That tradeoff matters.

A lower monthly payment doesn’t automatically mean something costs less over time.

Cash Out Refinance for Debt Consolidation

Debt consolidation is one of the most common reasons homeowners consider accessing their equity.

Imagine someone has:

Credit cards: $30,000
Personal loan: $15,000
Auto loan: $20,000

That’s $65,000 of debt in addition to the mortgage.

Depending on the interest rates and required monthly payments on those accounts, consolidating some or all of that debt through home equity could potentially create substantial monthly cash-flow savings.

It may also affect the homeowner’s debt-to-income ratio, which is one of the calculations lenders use when determining mortgage qualification.

But I would never look only at the monthly savings.

We also want to compare:

Current interest rates on the debt

Remaining repayment periods

New mortgage rate

Closing costs

Total monthly savings

How long you expect to keep the mortgage

Whether consolidating the debt actually improves the homeowner’s long-term financial position

If someone pays off $30,000 of credit-card debt with their home equity and then runs those credit cards back up again, they haven’t solved the problem.

They’ve potentially made it worse.

Used responsibly, however, a cash out refinance can be a powerful debt-consolidation tool.

Cash Out Refinance for Home Improvements

Another common reason homeowners access their equity is to improve the property itself.

That could include:

• Kitchen remodeling
• Bathroom renovations
• Finishing a basement
• Replacing a roof
• New windows
• HVAC upgrades
• Adding a bedroom
• Building an addition
• Exterior improvements
• Major landscaping projects

Using equity for improvements can be especially appealing because you’re investing money back into the property.

That doesn’t mean a $50,000 renovation automatically increases your home’s value by $50,000.

Some improvements provide a better return than others, and personal preferences don’t always translate dollar-for-dollar into resale value.

If you’re planning a major renovation, it may also be worth comparing a traditional cash out refinance with renovation loan options, depending on the project and your financial situation.

Cash Out Refinance vs. Rate-and-Term Refinance

It’s also important to understand that not every refinance is a cash out refinance.

A rate-and-term refinance is generally designed to change the terms of your existing mortgage without taking significant equity out of the property.

For example, someone might refinance to:

• Reduce their interest rate
• Change the loan term
• Move from an adjustable-rate mortgage to a fixed-rate mortgage
• Change mortgage programs
• Restructure their monthly payment

A cash out refinance has a different objective.

You’re intentionally increasing the mortgage balance in order to access equity.

Because the lender is providing additional cash secured by the property, cash out refinances can have different qualification requirements, pricing and maximum loan-to-value limits than other refinance transactions.

That distinction becomes especially important when we compare conventional, FHA and VA cash out refinance options, which we’ll get into next.

Conventional Cash Out Refinance

For many Michigan homeowners, a conventional cash out refinance will be one of the first options we evaluate.

Conventional financing can be a good fit for borrowers with sufficient equity, stable qualifying income and a solid overall credit profile.

For a standard one-unit primary residence, conventional cash out financing commonly allows a maximum 80% loan-to-value ratio, although the actual limit depends on factors such as occupancy and property type. Conventional cash out transactions also have specific seasoning and ownership requirements. For example, under current Fannie Mae guidelines, an existing first mortgage being paid off generally must be at least 12 months old, and at least one borrower generally must have been on title for six months, subject to certain exceptions.

This is important because having $200,000 in equity doesn’t necessarily mean you can access all $200,000.

Conventional Cash Out Example

Let’s say:

Home value: $500,000
Current mortgage balance: $250,000
80% of home value: $400,000

A new mortgage of $400,000 could potentially provide approximately $150,000 in gross cash proceeds after paying off the existing $250,000 mortgage.

Closing costs, prepaid expenses, other liens and the final approved loan amount would affect the actual amount received at closing.

You also don’t have to borrow the maximum.

If you only need $50,000, it may make much more sense to structure the mortgage around what you’re actually trying to accomplish rather than automatically borrowing every dollar available.

FHA Cash Out Refinance

An FHA cash out refinance can provide another option for homeowners who want to access equity.

FHA financing may be particularly useful when a borrower’s overall credit or qualification profile doesn’t fit as comfortably within conventional guidelines.

That doesn’t mean FHA is automatically easier or less expensive.

FHA loans have their own mortgage insurance requirements, underwriting guidelines and costs that need to be considered when comparing the options.

This is where looking beyond the interest rate becomes important.

If conventional financing provides one payment and FHA provides another, we should compare the complete picture, including:

• Interest rate
• Mortgage insurance
• Closing costs
• Maximum cash available
• Monthly payment
• Qualification requirements
• Long-term cost of the loan

The mortgage with the lowest advertised interest rate isn’t necessarily the mortgage that makes the most financial sense.

VA Cash Out Refinance

Eligible veterans, active-duty service members and certain surviving spouses may also have access to a VA cash out refinance.

VA financing can be especially powerful because VA guidelines can permit cash out refinancing up to 100% of the property’s reasonable value, although lender requirements, qualification standards and other VA rules still apply.

VA also requires cash out refinance transactions to meet specific requirements designed to demonstrate a benefit to the veteran.

One interesting feature of the VA cash out program is that the mortgage you’re refinancing does not necessarily have to already be a VA loan.

Depending on eligibility and qualification, a veteran may potentially use a VA cash out refinance to replace an existing conventional, FHA or VA mortgage.

That can create options worth exploring for eligible Michigan homeowners.

However, just because VA guidelines may allow a higher LTV doesn’t mean borrowing the maximum amount is always the right decision.

The goal should still be to determine how much equity you actually need to access and whether the new mortgage improves your overall financial situation.

Cash Out Refinance Requirements

Regardless of the mortgage program, a cash out refinance still requires you to qualify for the new loan.

A lender will generally evaluate many of the same things considered when you originally purchased the home, including:

• Credit history
• Qualifying income
• Employment
• Assets when required
• Current mortgage payment history
• Property value
• Existing liens
• Loan-to-value ratio
• Debt-to-income ratio
• Property type and occupancy

Your mortgage underwriting may also require updated income and asset documentation, even if you’ve made every mortgage payment on time for years.

The fact that you have substantial equity doesn’t automatically mean income and credit requirements disappear.

You’re applying for a new mortgage, and that new mortgage has to meet the applicable underwriting guidelines.

Does Credit Score Matter on a Cash Out Refinance?

Yes.

Your credit profile can affect both your ability to qualify and the pricing available on the new mortgage.

Generally, stronger credit can provide access to more favorable conventional mortgage pricing.

But credit score isn’t the only factor.

The lender is looking at the entire loan profile, including the amount of equity remaining in the home, debt-to-income ratio, mortgage history, income, assets and property.

This is another reason it can be useful to run multiple scenarios.

For example, borrowing at 80% LTV may produce different pricing than borrowing at 70% or 75% LTV.

If you don’t actually need the additional cash, borrowing less may potentially create a better overall mortgage structure.

Debt-to-Income Ratio and Cash Out Refinancing

Your debt-to-income ratio compares your monthly qualifying debt obligations with your qualifying gross monthly income.

This becomes particularly interesting when the purpose of the refinance is debt consolidation.

Let’s say you’re currently paying:

Credit cards: $900 per month
Personal loan: $600 per month
Auto loan: $700 per month

That’s $2,200 per month in payments before even considering the mortgage.

If the cash out refinance pays off some or all of those obligations, certain debts may no longer need to be included in the final qualifying DTI calculation when guideline requirements are met.

That can substantially change the overall financial picture.

Fannie Mae’s automated underwriting generally permits DTI ratios up to 50%, although cash out transactions can be subject to additional requirements. For example, Fannie Mae currently requires six months of reserves for a DU cash out refinance when DTI exceeds 45%.

But qualifying for a payment and being comfortable with a payment are two different things.

I always want to look at both.

Will You Need an Appraisal for a Cash Out Refinance?

In many cases, an appraisal will be required because the property’s value plays a major role in determining how much equity is available.

Remember, the calculation is based on the home’s current qualifying value, not simply what you believe the house is worth or what an online estimate says.

If you estimate your home is worth $500,000 but the qualifying valuation comes in at $475,000, the amount of cash available may change.

For example:

Estimated value: $500,000
80% LTV: $400,000

Compared with:

Appraised value: $475,000
80% LTV: $380,000

That’s a $20,000 difference in maximum potential loan amount.

The appraisal can therefore be a very important part of a cash out refinance.

Cash Out Refinance vs. HELOC

This is one of the most important comparisons in this entire guide.

A cash out refinance replaces your existing first mortgage.

A HELOC, or home equity line of credit, generally sits behind your existing first mortgage as a second lien.

That difference can be huge.

Imagine you currently owe $200,000 on a mortgage with a 3.25% interest rate and you need $50,000 for home improvements.

With a cash out refinance, you may have to replace that entire $200,000 low-rate mortgage with a new $250,000 mortgage at current market rates.

With a HELOC, you may be able to leave the existing $200,000 first mortgage alone and borrow only the additional $50,000.

That doesn’t automatically make the HELOC better.

HELOCs commonly have variable rates, and the payment structure can change over time.

But when someone has an extremely attractive first-mortgage rate, preserving that mortgage can be valuable.

When a Cash Out Refinance May Make More Sense

A cash out refinance may deserve stronger consideration when:

• You need a substantial amount of equity
• Your existing mortgage rate isn’t dramatically below current rates
• You prefer one mortgage payment
• You want a fixed-rate structure
• You’re consolidating significant high-interest debt
• The overall monthly cash-flow improvement is substantial
• The numbers make sense after considering closing costs

When a HELOC May Make More Sense

A HELOC may deserve stronger consideration when:

• You have a very low existing first-mortgage rate
• You only need a relatively small amount of money
• You want to borrow funds over time instead of receiving everything at once
• You’re funding an ongoing renovation project
• You want to preserve your current first mortgage

There isn’t one answer that’s right for everyone.

That’s why BrightSide Lending offers access to both refinance and HELOC options. We can compare the numbers instead of trying to force every homeowner into the same product.

Cash Out Refinance vs. Home Equity Loan

A home equity loan is another option worth comparing.

Like a HELOC, a home equity loan can allow you to access equity without replacing your existing first mortgage.

The major difference is typically how the money is distributed and repaid.

A HELOC generally provides a revolving line of credit that you can draw from as needed.

A home equity loan generally provides a lump sum with a structured repayment schedule.

So now we potentially have three ways to access equity:

Cash out refinance: Replace the first mortgage and receive cash.

HELOC: Keep the first mortgage and open a revolving second mortgage.

Home equity loan: Keep the first mortgage and receive a lump sum through a second mortgage.

Which one makes sense depends heavily on your existing mortgage.

And that brings us to what I consider the most important calculation of all:

Does accessing your equity actually save you money or improve your financial situation once we account for the new rate, payment and closing costs?

How Do You Know if a Cash Out Refinance Actually Makes Sense?

Accessing equity is easy to understand.

Determining whether you should access it takes a little more thought.

One of the biggest mistakes homeowners can make is focusing only on the amount of cash they’ll receive or how much their monthly debt payments will decrease.

We need to look at the entire transaction.

That includes:

• Your current mortgage balance
• Your current mortgage rate
• Your remaining loan term
• The new mortgage amount
• The new interest rate
• Closing costs
• Debts being paid off
• Monthly payment savings
• How long you expect to remain in the home
• What you’re planning to do with the cash

For some homeowners, the numbers can be extremely compelling.

For others, keeping their existing first mortgage and using a HELOC or home equity loan could make considerably more sense.

The goal isn’t simply to qualify for a cash out refinance.

The goal is to determine whether it actually improves your financial situation.

Be Careful Replacing a Low Mortgage Rate

This has become especially important for homeowners who purchased or refinanced when mortgage rates were much lower.

Suppose you currently owe $250,000 at 3.00% and want to access $50,000 of equity.

A cash out refinance could require replacing that entire $250,000 mortgage, plus the additional cash you’re borrowing, with a new mortgage at today’s market rate.

You’re not just paying today’s interest rate on the $50,000 you’re taking out.

You’re potentially giving up the low rate on the entire existing mortgage balance.

That’s a major consideration.

This is one reason comparing a cash out refinance vs. HELOC can be so important.

A HELOC or home equity loan may carry a higher interest rate than a first mortgage, but you’re only paying that rate on the additional money you borrow while preserving the existing first mortgage.

Sometimes that wins.

Sometimes it doesn’t.

We need to run the numbers.

Cash Out Refinance for Credit Card Debt: Look Beyond the Interest Rate

Let’s say you have $50,000 in credit-card debt with interest rates ranging from 18% to 29%.

Using home equity to eliminate those balances could potentially reduce the interest rate on that debt and significantly lower the required monthly payments.

But there’s an important catch.

Credit cards are generally unsecured debt.

Your mortgage is secured by your home.

When you use a cash out refinance to pay off credit cards, you’re effectively moving that debt onto your house.

You’re also potentially stretching debt that might otherwise be paid off over several years across a much longer mortgage term.

That means you should not evaluate the transaction based solely on:

“My monthly payment goes down $1,200.”

That’s obviously important, but I also want to know what happens next.

If you’re using the improved cash flow to get your finances under control, build savings, eliminate other debt and avoid accumulating new credit-card balances, a cash out refinance could be extremely useful.

If you immediately begin rebuilding the same credit-card balances, you’ve potentially created a much larger financial problem.

The strategy matters just as much as the mortgage.

Should You Take the Maximum Cash Available?

Not necessarily.

If you qualify to take $100,000 out of your home but only need $60,000, there may be no reason to borrow the additional $40,000.

Remember that you’re paying interest on the money you borrow.

The amount of equity remaining in the property can also affect mortgage pricing and qualification.

We can compare several loan amounts instead.

For example:

Option 1: Take $50,000 cash out
Option 2: Take $75,000 cash out
Option 3: Take $100,000 cash out

Then compare the payment, rate, closing costs and remaining equity for each option.

This is much more useful than simply asking, “What’s the most I can get?”

What Closing Costs Come With a Cash Out Refinance?

A cash out refinance is a new mortgage transaction, so closing costs can apply.

Depending on the loan and transaction, costs may include things such as:

• Lender-related charges
• Title services
• Recording fees
• Appraisal costs
• Credit-related charges
• Prepaid interest
• Initial escrow deposits
• Applicable mortgage insurance or program-specific fees

Some costs may be financed into the new mortgage when guidelines and available equity permit.

That can reduce the amount of money you need to bring to closing, but financing costs also increases the amount you’re borrowing.

This is another reason I recommend looking at the net cash you actually receive, not simply the new loan amount.

How Long Does a Cash Out Refinance Take?

A cash out refinance can often be completed within a few weeks, although every transaction is different.

The timeline can depend on:

• How quickly documentation is provided
• Appraisal requirements
• Property type
• Title work
• Income complexity
• Underwriting
• Existing liens
• Loan program
• Whether additional documentation or conditions are required

Once the application is submitted, the loan generally moves through the normal mortgage underwriting process.

That means the underwriter may review your income, assets, credit, property, existing mortgage and other documentation before issuing final approval.

Is the Cash Available Immediately at Closing?

Not necessarily.

For many refinances of a borrower’s principal residence, federal law provides a three-business-day right of rescission after signing. During that period, the borrower generally has the right to cancel the transaction. Funds are typically disbursed after the rescission period expires.

This is different from a typical home purchase, where there generally isn’t a comparable three-business-day cancellation period after closing.

If you need the cash for a specific deadline, make sure we discuss the timing before structuring the refinance.

Are Cash Out Refinance Proceeds Taxable?

Generally, money received from a cash out refinance isn’t treated as taxable income because you’re borrowing money rather than earning income.

However, whether the mortgage interest is tax deductible is a separate question and can depend on how the proceeds are used and your individual tax situation.

IRS rules can be especially important when homeowners use mortgage proceeds for purposes other than buying, building or substantially improving the property securing the loan.

BrightSide Lending can help you understand the mortgage side of the transaction, but questions about your individual tax consequences should be discussed with a qualified tax professional.

Can You Do a Cash Out Refinance on an Investment Property?

Potentially, yes.

Cash out refinancing isn’t limited to primary residences.

Depending on the mortgage program and your qualifications, it may also be possible to complete a cash out refinance on:

• Second homes
• Rental properties
• Other eligible investment properties

The guidelines can be different from a primary residence, including maximum loan-to-value requirements.

Real estate investors may use cash out refinancing to access equity from an existing property and deploy that capital toward another investment.

Again, accessing the maximum amount isn’t necessarily the objective.

The new payment, rental income, cash flow and overall investment strategy all need to make sense.

When Might a Cash Out Refinance Make Sense?

A cash out refinance may be worth exploring when you have substantial home equity and want to accomplish a specific financial goal.

Examples could include:

• Consolidating high-interest debt
• Funding substantial home improvements
• Paying off expensive personal loans
• Accessing a large amount of equity at once
• Purchasing another property
• Restructuring several monthly obligations
• Replacing an existing mortgage that isn’t significantly better than current financing

It can become especially interesting when the refinance accomplishes more than one objective.

For example, perhaps you’re accessing $60,000 of equity while also paying off several high-payment debts and moving into a mortgage structure that works better for your overall financial plan.

That’s very different from taking cash out simply because the equity is available.

When Might a Cash Out Refinance NOT Make Sense?

There are also situations where I would want to look closely at alternatives.

For example:

• You have an extremely low first-mortgage rate
• You only need a small amount of money
• You’re planning to sell the home soon
• Closing costs outweigh the benefit
• The new payment creates unnecessary financial strain
• A HELOC or home equity loan accomplishes the same goal more efficiently
• You’re using the money to solve a spending problem without addressing the underlying issue

Home equity is valuable.

Accessing it means increasing the debt secured by your home, so there should be a reason for doing it.

Cash Out Refinance vs. HELOC vs. Home Equity Loan

If you’re trying to decide how to access your home equity, don’t start by choosing the product.

Start with the goal.

Need a large lump sum and your current first-mortgage rate isn’t particularly valuable?
A cash out refinance may be worth considering.

Have a very low first-mortgage rate and want to preserve it?
A HELOC or home equity loan may be more attractive.

Need money periodically for a renovation or ongoing project?
The revolving structure of a HELOC may fit better.

Want a lump sum with a more predictable payment while keeping your existing first mortgage?
A home equity loan may deserve a closer look.

BrightSide Lending can compare these options based on the actual numbers rather than assuming one product is always better.

Frequently Asked Questions About Cash Out Refinancing in Michigan

How much equity do I need for a cash out refinance?

It depends on the mortgage program, property type and occupancy. Conventional cash out refinancing on a one-unit primary residence commonly allows financing up to 80% LTV, while other programs can have different limits.

Can I take all of the equity out of my home?

Usually not with conventional financing. Most programs require you to maintain a certain amount of equity after the refinance. VA cash out financing can have different maximum LTV rules for eligible borrowers.

Can I use cash out refinance money for anything?

Cash out proceeds generally provide considerable flexibility. Homeowners may use the funds for debt consolidation, renovations, education, investments, major expenses or other purposes, subject to applicable program requirements.

Does a cash out refinance have a higher rate?

It can. Mortgage pricing is based on numerous factors, including loan purpose, credit profile, loan-to-value ratio, property type and market conditions. That’s why we compare the actual options rather than assuming your refinance rate will be the same as a purchase or rate-and-term refinance.

Will I need an appraisal?

Often, yes. The property’s qualifying value is important because it helps determine your loan-to-value ratio and the amount of equity available.

Can I pay off credit cards with a cash out refinance?

Yes. Debt consolidation is one of the common reasons homeowners use cash out refinancing. We should compare the new mortgage against the debts being eliminated to determine whether the transaction makes financial sense.

Is a HELOC better than a cash out refinance?

Neither is automatically better. If you have a very low first-mortgage rate, keeping that mortgage and adding a HELOC may be attractive. In other situations, replacing the first mortgage with a cash out refinance may provide a better overall structure.

How soon after a cash out refinance do I receive the money?

For a refinance secured by your principal residence that is subject to the federal right of rescission, funds generally aren’t disbursed until the three-business-day rescission period has expired.

Compare Your Michigan Home Equity Options

If you’ve built substantial equity in your home, a cash out refinance can give you access to money that would otherwise remain tied up in the property.

But it shouldn’t be viewed in isolation.

At BrightSide Lending, we can compare a cash out refinance with HELOC and home equity loan options, look at your current mortgage rate, calculate the payment differences and determine how much equity you may actually be able to access.

Sometimes the cash out refinance wins.

Sometimes keeping your current mortgage wins.

The important part is knowing the difference before you replace your existing loan.

If you’re considering debt consolidation, home improvements, a major purchase or simply want to understand how much equity you could access, contact BrightSide Lending and we’ll run the numbers with you.