Cash-Out Refinance True Cost Calculator
Example: Current mortgage balance: 220000 $ · Years remaining on current loan: 22 yrs · Current mortgage rate: 3.5 %/yr · Cash-out amount: 60000 $ · New mortgage rate after cash-out refi: 7 %/yr · Closing costs: 6000 $ · Alternative investment return (if not refinancing): 7 %/yr · Years you plan to keep the home: 10 yrs
| True cost of the cash-out (interest increase + closing) | $129,747 |
| Extra interest vs keeping your old loan | $123,747 |
| What the cash-out amount grows to if invested | $60,580 |
| Net benefit of investing cash-out vs cost | $-69,167 |
Worked example
Refinancing a $220,000 balance at 3.5% with 22 years left to $286,000 at 7% (adding $60,000 cash + $6,000 closing): over 10 years, the interest cost increase is about $62,000 vs keeping the old loan. Total true cost of the cash-out: $68,000 (including closing costs). The $60,000 invested at 7% for 10 years grows to $118,000 — a $58,000 gain above principal. Net benefit of investing: $58,000 gain minus $68,000 cost = a -$10,000 net loss. The cash-out refi costs more than investing the proceeds earns, especially when refinancing out of a low-rate loan.
Frequently asked questions
When does a cash-out refi make sense?
When the cash is used to fund something with a higher return than the new mortgage rate — like a high-ROI home renovation, paying off higher-rate debt (credit cards, personal loans), or starting a business. Using cash-out proceeds to fund consumption or discretionary purchases at 7% mortgage rates rarely makes mathematical sense.
Why is a cash-out refi especially costly when refinancing out of a low-rate loan?
If you have a 3–4% mortgage from 2020–2021, refinancing at today's rates means trading every dollar of your balance from the old rate to the new rate — not just the cash-out amount. The rate shock on the existing balance is often the largest hidden cost.
Are there alternatives to a cash-out refi for tapping equity?
Yes. A HELOC (home equity line of credit) or home equity loan lets you borrow against equity without touching your first mortgage. This preserves your existing rate on the primary loan. HELOCs are typically adjustable-rate; home equity loans are fixed. Both carry their own interest cost but avoid the full-loan refinance penalty.