How to Use the Cash Out Refinance Calculator
A cash out refinance calculator is an essential tool for homeowners looking to leverage their home equity for large expenses like home improvements, debt consolidation, or investments. This tool helps you estimate your new monthly payment and determines if you have enough equity to meet lender requirements.
To use this calculator, simply enter your home's current market value, your existing mortgage balance, and the amount of cash you wish to receive. The calculator will factor in closing costs and provide a complete picture of your new loan structure.
- Home Value
- The current estimated market price of your property. Lenders usually require a professional appraisal during the process.
- Current Loan Balance
- The remaining principal on your existing mortgage.
- Desired Cash Out
- The specific dollar amount you want to receive in hand after the refinance is finalized.
- Closing Costs
- Fees associated with the loan, typically ranging from 2% to 5% of the new loan amount. These are often rolled into the loan balance.
How a Cash Out Refinance Works
When you opt for a cash-out refinance, you are replacing your current mortgage with a new, larger loan. The new loan pays off your old mortgage, covers closing costs, and provides you with the remaining difference in cash. The critical metric lenders look at is the Loan-to-Value (LTV) ratio.
LTV Ratio = (Total New Loan Amount / Home Value) × 100
Most conventional lenders limit your LTV to 80% for a cash-out refinance. This means you must leave at least 20% equity in the home. For example, if your home is worth $500,000, your total new loan (including the old balance and the cash out) cannot exceed $400,000.
Calculation Example
Scenario: A homeowner wants to renovate their kitchen and needs $40,000. They have a home worth $350,000 and an existing mortgage balance of $180,000.
Step-by-step breakdown:
- Current Balance: $180,000
- Cash Desired: $40,000
- Estimated Closing Costs: $5,000
- Total New Loan Amount: $180,000 + $40,000 + $5,000 = $225,000
- LTV Check: ($225,000 / $350,000) = 64.3%. This is well below the 80% limit.
- New Payment: At a 6.5% interest rate for 30 years, the new principal and interest payment would be approximately $1,422.15.
Frequently Asked Questions
What is the 80% rule in cash-out refinancing?
The 80% rule is a standard lender requirement that prevents borrowers from taking out a loan that exceeds 80% of the home's appraised value. This ensures the homeowner maintains a 20% equity cushion, reducing the risk for the lender. Some VA loans allow for higher LTV ratios, but 80% is the standard for conventional financing.
Are the proceeds from a cash-out refinance taxable?
Generally, no. The cash you receive from a refinance is considered a loan, not income. Therefore, it is not subject to income tax. However, the interest deductibility on that cash may be limited depending on how you use the funds (e.g., home improvements vs. debt consolidation). Always consult a tax professional for your specific situation.
How does it differ from a Home Equity Loan?
A cash-out refinance replaces your existing primary mortgage with a completely new one. A home equity loan (or HELOC) is a "second mortgage" that sits behind your original loan. Refinancing is often preferred if current market interest rates are lower than your original rate, while a second mortgage might be better if your original mortgage has a very low rate you don't want to lose.