What is a cash-out refinance and when does it make sense in Wisconsin?
Rob Miller explains how a cash-out refinance works in Wisconsin, and when it makes sense to tap your home equity for renovations or debt consolidation.
Rob Miller, Branch Manager at MadCity Home Loans, answers one of the most common questions we get from Wisconsin homeowners.
What is a cash-out refinance and when does it make sense in Wisconsin?
A cash-out refinance is exactly what it sounds like: you are replacing your current mortgage with a new, larger mortgage, and taking the difference in cash.
Over the last few years, home values in Madison and Dane County have surged. Many homeowners are sitting on $100,000 or more in "trapped" equity. A cash-out refinance is how you unlock that money.
How the Math Works
Let's say your home is currently worth $400,000, and you only owe $200,000 on your current mortgage. You have $200,000 in equity.
Most lenders in Wisconsin will allow you to borrow up to 80% of your home's total value.
80% of $400,000 = $320,000.
We would write you a new mortgage for $320,000. The first $200,000 pays off your old mortgage. The remaining $120,000 (minus closing costs) is handed to you as tax-free cash at closing.
When Does a Cash-Out Refinance Make Sense?
- Home Renovations: If you love your neighborhood but outgrew your house, pulling cash out to finish a basement, update a kitchen, or add a bathroom is often much cheaper than selling and buying a new house in this market. Plus, the renovations increase the home's value further.
- Debt Consolidation: This is the most powerful use of a cash-out refinance. If you have $40,000 in credit card debt at 25% interest, and a car loan at 8%, rolling that debt into a mortgage (even if the mortgage rate is 7%) can save you thousands of dollars a month in cash flow.
- Buying Investment Property: Many of my clients use a cash-out refinance on their primary residence to secure the 20% down payment needed to buy a rental property or a lake house up north.
When Should You AVOID a Cash-Out Refinance?
Do not use your home equity to fund a lifestyle you cannot afford (like taking a luxury vacation or buying a boat). You are putting your house on the line. I only recommend cash-out refinances if the money is being used to improve your net worth or drastically improve your monthly cash flow.
Related Guide: See if a cash-out makes sense for your specific scenario by exploring our Wisconsin Refinancing Guide.