New monthly payment
$2,063.87
Principal & interest: $479.68 more than your current $1,584.19 payment
Cash you receive
$50,000
New loan amount
$309,278
New loan-to-value
77.3%
Most cash available
$60,400
You receive $50,000 and your payment rises by $479.68 a month. Over the life of the new loan you pay $189,447 more in interest plus $9,278 in closing costs than if you kept your current mortgage: about $3.97 for every $1 of cash. Put another way, the extra you pay is like borrowing the cash at about 11.8% a year. The new rate is higher than your current rate and applies to your whole balance, not only to the cash.
Where the new loan goes
- Pays off your current mortgage
- $250,000
- Cash to you
- $50,000
- Closing costs added to the loan
- $9,278
- New loan amount
- $309,278
- Most the new loan could be ($400,000 × 80%)
- $320,000
- New loan-to-value
- 77.32%
- Equity left in the home after closing
- $90,722
What the cash costs
- Interest on the new loan
- $433,715
- Interest left on your current mortgage
- $244,268
- Extra interest from refinancing
- $189,447
- Closing costs
- $9,278
- Cost of the cash (extra interest + closing costs)
- $198,726
- Cost per $1 of cash
- $3.97
- Effective rate on the cash
- 11.8% a year
The cost includes the extra interest on the cash plus the effect of the new rate and term on the balance you already owe. Because the cash is repaid over many years, the cost per $1 is often more than $1. The effective rate treats each month’s extra payment as a payment on a loan that gave you the cash, so you can compare it with a second loan’s rate.
Current mortgage vs. cash-out refinance
| Keep current mortgage | Cash-out refinance | |
|---|---|---|
| Loan amount | $250,000 | $309,278 |
| Interest rate | 6% | 7.03% |
| Monthly payment (principal & interest) | $1,584.19 | $2,063.87 |
| Time to pay off | 26 years | 30 years |
| Total interest | $244,268 | $433,715 |
| Closing costs | $0 | $9,278 |
| Cash to you | $0 | $50,000 |
Cash-out refinance or a second loan?
| Cash-out refinance | Keep mortgage + second loan | |
|---|---|---|
| Cash to you | $50,000 | $50,000 |
| Debt on the home after closing | $309,278 | $300,000 |
| Combined loan-to-value | 77.3% | 75% |
| Interest rate | 7.03% | 6% and 8.5% (blended 6.417%) |
| Monthly payment (principal & interest) | $2,063.87 | $2,076.56 |
| Total interest | $433,715 | $282,895 |
| Closing costs and fees | $9,278 | $0 |
| Interest + costs over the full terms | $442,994 | $282,895 |
- Effective rate on the cash-out (break-even rate for a second loan)
- 11.8%
- Second loan APR including fees
- 8.5%
Keeping your mortgage and borrowing $50,000 on a second loan at 8.5% for 15 years gives a combined payment of $2,076.56, $12.69 more than the cash-out refinance and $160,099 less in interest and fees over the full terms. A second loan would need an APR below 11.8% to cost less per year than the cash-out refinance does; the example second loan’s APR is 8.5%.
Debt on the home over time
- Keep current mortgage
- Cash-out refinance
- Mortgage + second loan
Assumes fixed rates and level monthly payments, and that you take the cash once. Lenders set their own loan-to-value limit, credit and income standards, and fees. FHA loans add mortgage insurance and VA loans add a funding fee: include the upfront amounts in the closing costs. Property taxes, homeowners insurance, mortgage insurance and any tax deduction are not included.