A cash-out refinance allows you to tap your home equity and access cash for financial goals such as a home remodel or college tuition. However, the cash you’ll get isn’t free money, and in fact, you’ll likely have to pay more in interest on the mortgage.
Are cash-out refinance rates higher?
While the difference isn’t extraordinary, cash-out refinance rates are typically higher than their rate-and-term counterparts. This is because mortgage lenders consider a cash-out refinance relatively higher-risk, since it leaves you with a larger loan balance than you had previously and a smaller equity cushion. In addition, lenders might view taking out cash as a method of masking serious financial issues, like overwhelming debt or impending job loss.
The difference between a cash-out and no-cash-out refinance rate also depends on the type of loan. For example, FHA loans don’t have a risk adjustment between purchases and refinances, so the rate will be determined by your loan-to-value (LTV) ratio and credit score (more on what factors into your rate below).
How much higher are cash-out refinance rates?
For a borrower with good credit doing a cash-out refinance on a loan tied to a primary residence, the cash-out refi rate is generally one-quarter to one-half percentage point higher than the rate on a rate-and-term refinance, says Greg McBride, CFA, chief financial analyst at Bankrate.
“This can fluctuate depending on market conditions, and could be higher,” says McBride.
If you retain more equity after the refinance, the rate difference might not be as drastic.
The more equity you have, the more incentive you have to make the payments because that is your skin in the game
— Greg McBrideChief Financial Analyst at Bankrate
“More equity reduces the risk to the lender because they’re funding less of the overall property cost and in the event of default, there is a margin of safety before they take a loss.”
How cash-out refinance rates are determined
To determine cash-out refinance rates, mortgage lenders take a baseline interest rate and then make adjustments based on your credit score and LTV ratio. Having a higher credit score and lower LTV ratio will help you score a more favorable rate.
Other factors, such as economic conditions (including inflation) and the lender’s overhead, influence your interest rate, as well. The movement of the 10-year Treasury, specifically, is linked to the movement in fixed mortgage rates.