A cash-out refinance can be a great option for homeowners who need a little bit of extra cash. A mortgage refinance replaces your current mortgage loan with a new one that’s more than what you currently owe on the home. The extra cash can be used for whatever the homeowner wants, such a home renovation, debt consolidation, tuition or any other financial needs. Refinancing can also provide homeowners with a lower interest rate and monthly payments, helping them save hundreds or thousands of dollars over the life of their loan.
6 Best Cash-out Refinance Rates of 2020
- Quicken Loans: Best for customer satisfaction
- Chase: Best for customer discounts
- Freedom Mortgage: Best for active military and veterans
- SunTrust Bank: Best for online education
- Bank of America: Best for classic banking experience
- Alliant: Best for a credit union experience
What is a cash-out refinance?
When homeowners are looking to refinance their mortgage, sometimes they have additional financial needs, such as home improvement, tuition costs or other large expenses. With a cash-out refinance, borrowers can not only refinance their current mortgage and potentially lower their interest rate, they can also take out more funds above the amount of the mortgage. The extra funds are based on the amount of home equity available, and borrowers can usually request up to 80% of the home’s available equity. For example, if a home has $100,000 in equity available, the lender may allow the homeowner to borrow up to $80,000. That $80,000, or however much is requested, will be tacked on to the mortgage amount.
Let’s say the borrower is refinancing his or her mortgage for $200,000; the $80,000 of extra funds would then create a new loan amount of $280,000 that the borrower is responsible for paying back. They’ll get those funds in one large lump sum to use at their discretion.
Cash-out refinance vs. home equity line of credit
A cash-out refinance and a home equity line of credit can be used for the same financial needs, but the loans themselves have many different factors. A HELOC is considered a second mortgage separate from the original mortgage used to purchase the home. A HELOC is also known as a revolving line of credit, similar to a credit card, where a consumer can use a portion of the funds, pay it back, and those funds become available for use again. Typically, a HELOC has a draw period, the amount of time the borrower can use funds, and a repayment period, an amount of time after the draw period during which the borrower can only pay back funds. A cash-out refinance, on the other hand, is a great option for homeowners who would like one monthly payment with the extra funds upfront. In addition to keeping one monthly payment, a cash-out refinance typically has a lower interest rate than a HELOC and it has the advantage of being able to lock in a low fixed interest rate, while a HELOC may be variable.
Fixed-rate refinance vs. adjustable-rate mortgage
Two standard mortgage options are a fixed-rate mortgage and an adjustable-rate mortgage (ARM). A fixed mortgage has a locked-in interest rate, so the rate you get for your mortgage will be the rate for the life of the loan unless you refinance later on. An adjustable-rate mortgage has a fixed rate for a certain number of years and after that period ends, it adjusts to match the current index. For example, a 5/1 ARM has a fixed rate for the first 5 years and then it becomes a variable rate. With an ARM, the starting interest rate is usually lower than that of a standard fixed-rate mortgage, but it can increase after the initial fixed-rate period. Borrowers who are juggling between these two options should consider how long they plan to stay in their current home after refinancing. If it is less than five to 10 years, an ARM may be a great option with a lower interest rate. However, if the borrower is going to stay in his or her home for longer than that, a fixed-rate mortgage could be the better option to avoid rising rates and the potential of having to refinance again.
15-year mortgage vs. 30-year mortgage
A large debate in the mortgage realm is whether a 15-year or 30-year mortgage is better. The truth is, it all depends on what the borrower can afford. Typically, a 15-year fixed mortgage will have a lower rate than a 30-year mortgage, but the monthly payment will be significantly higher due to a shorter time frame to pay the loan back. The benefit of a 30-year fixed mortgage is the opportunity to have lower monthly payments that are more budget-friendly to borrowers. The big downside is that homeowners will pay thousands more in interest over the life of the loan with a 30-year mortgage than a 15-year one. Borrowers must take a detailed look at their finances in order to determine which option will be better for them in the long run.
6 best cash-out refinance lenders of 2020
Quicken Loans: Best for customer satisfaction
Known for its great customer service, Quicken Loans has been helping borrowers for over three decades. With low rates and flexible loan options, Quicken Loans seems to have a product for everyone. Quicken Loans has also been awarded No. 1 in Customer Satisfaction by J.D. Power nine times. The application process with Quicken Loans is completely online or over the phone, allowing borrowers to get a mortgage from the comfort of their own home, on their own schedule, with extended chat hours.
Quicken Loans is currently offering some of its lowest mortgage rates in the past 10 years. Homeowners can apply for the following options:
- 30-Year Fixed VA at 2.875% (3.309% APR)
- 10-Year Fixed at 2.5% (3.12% APR)
- 30-Year Fixed at 3.125% (3.383% APR)
- 15-Year Fixed at 2.5% (2.979% APR)
- 30-Year Fixed FHA at 3.25% (4.229% APR)
Chase: Best for customer discounts
As one of the largest banks in the world, Chase has a wide array of products and services for their customers, including cash-out refinancing. With Chase, current banking and credit card customers can potentially receive a percentage off their refi rate. There are eligibility standards, so it is important for borrowers to confirm with Chase whether or not they qualify for the discount. Along with discounts, Chase also offers an electronic way to submit important documents needed for the loan application. If a borrower already banks with Chase, this also allows the option to keep all of their accounts and products in one place for convenience.
Chase offers different refinance rates depending on your location. One sample of current refinance rates includes the following options:
- 30-Year Fixed at 3.125% (3.206% APR)
- 15-Year Fixed at 2.625% (2.755% APR)
- 7/1 ARM at 2.625% (2.772% APR)
- 5/1 ARM at 2.375% (2.695% APR)
Freedom Mortgage: Best for active military and veterans
Freedom Mortgage prides itself on being one of the top mortgage lenders in the U.S. Its main focus is on helping those who are in or have been in the military make their homeownership dreams a reality, which it has been doing for over 25 years. Alongside home purchases, it also offers a cash-out refinancing option to help consumers pay for other financial expenses. Freedom Mortgage also makes an “Eagle Eye pledge,” where it contacts customers and lets them know of lower rates, how to get the most out of their home equity and when the value of the borrower’s home increases. Freedom Mortgage is also one of the nation’s leading VA loan lenders, making it an ideal provider for U.S. military personnel.
Freedom Mortgage doesn’t offer their current mortgage rates online, but they do offer customers a mortgage refinance calculator to help you customize your rate.
SunTrust Mortgage: Best for online education
In 2015, SunTrust Mortgage switched over to a new loan origination system to help ease the process of mortgage applications and tracking. One of the major items that was improved upon was its online portal, which now has an online educational system to help both homebuyers and those looking to refinance learn more about different products geared toward their needs. A large perk of SunTrust Mortgage is its low rates. It has one of the lower refinance rates in the country, making it an appealing lender for many borrowers across the country.
SunTrust is currently offering the following mortgage rates on 0-point mortgages:
- 30-year fixed refinance at 3.600% (3.7145% APR)
- 15-year fixed refinance at 2.400% (2.6482% APR)
Bank of America: Best for classic banking experience
For more than 20 years, Bank of America has served as one of the world’s leading financial institutions. It serves over 66 million customers and a large majority of Fortune 500 companies. Borrowers who do business with Bank of America can expect a traditional banking experience in which they can do all of their business in person, over the phone, or even online. With branches all over the globe, Bank of America has a convenient location for almost anyone. Its mortgage and refinance application process is now easier than ever for consumers with their electronic application portal, where borrowers can easily track their application status and even get pre-approved the same day.
Like other lenders, Bank of America mortgage rates vary depending on your location and home value. For a $250,000 some options for current rates include:
- 30-year fixed at 3.375% (3.532% APR)
- 20-year fixed at 3.250% (3.461% APR)
- 15-year fixed at 2.750% (3.036% APR)
Alliant: Best for a credit union experience
When individuals bank with a credit union, they are investing in a not-for-profit organization, unlike for-profit banks. This serves as a benefit for some borrowers due to credit unions typically charging lower rates than big banks. An excellent example of this is Alliant, which has a lower refinance rate than many large banks across the nation. Alliant only has one area with branches in Chicago, Illinois, so any consumer looking to refinance his or her loan with this credit union outside of Chicago may have to complete the process online and over the phone.
Alliant’s purchase rates vary based on individual loan characteristics. Current rates are as low as:
- 30-year fixed at 3% (3.053% APR)
- 20-year fixed at 2.875% (2.953% APR)
- 15-year fixed at 2.5% (2.506% APR)
Is now a good time for a cash-out refinance?
Mortgage rates in 2020 have reached an all-time low amid the COVID-19 pandemic. As of June, the average 30-year fixed mortgage rate was about 2.97%, while rates hovered above 3% toward the beginning of the year. Though current rates are low, the market has been marked by fluctuation tied to economic insecurity and Federal Reserve efforts to buy mortgage-backed bonds.
If you’ve been considering taking out a cash-out refinance loan, right now could be the best time to do so. Mortgage rates are likely lower than when you originally bought your home, meaning a cash-out refi can give you more money in your pocket. Recent mortgage data shows that right now, nearly 13 million homes are strong candidates for cash-out refinancing, which is up 60% since the beginning of 2020.
The final word
The decision to get a cash-out refinance comes down to a few different factors — typically interest rates, lower payments and other financial benchmarks that need to be covered. Still, it can be an ideal solution for anyone who has a good amount of home equity and is in the market to refinance his or her current mortgage. It can provide a more budget-friendly option for many homeowners, while simultaneously helping them fulfill other financial needs as well.
As of June 2020, cash-out refinancing is positioned as one of the best options for homeowners. The housing market has reached some of the lowest mortgage rates in years, offering a clear opportunity to take advantage of new options.