Key takeaways
- A cash-out refinance replaces your mortgage with a larger loan and pays you the difference in cash.
- Conventional and FHA cash-out loans commonly cap borrowing at 80% of your home's value; VA may allow more.
- You pay closing costs on the entire new loan, and your rate applies to the full balance.
- Using home equity to pay unsecured debt puts your house at risk if you cannot repay.
In this guide
A cash-out refinance replaces your current mortgage with a new, larger loan and pays you the difference in cash at closing. For example, if you owe $200,000 and refinance into a $260,000 loan, you receive about $60,000 minus closing costs. You then repay the entire new balance over the new term.
It is one of the most common ways to access home equity, along with home equity loans and HELOCs. Because it replaces your whole mortgage, the rate you get on the new loan matters more than it would on a smaller second loan.
How a cash-out refinance works
The process mirrors a standard refinance with a few added steps:
- Appraisal. The lender almost always orders a full appraisal to establish current value.
- Loan sizing. The lender applies a maximum loan-to-value ratio (LTV) to that value.
- Payoff and disbursement. At closing, the new loan pays off your existing mortgage and any required liens, covers closing costs if you roll them in, and sends the rest to you.
- New terms. You start a new loan, often 15 to 30 years, at the new rate.
For the full sequence of applications, rate locks and closing, see how to refinance a mortgage.
How much can you borrow?
Maximum LTV depends on the program and property type. Typical limits for a single-family primary residence look like this:
| Loan type | Common maximum LTV on cash-out | Notes |
|---|---|---|
| Conventional | 80% | Lower caps for second homes, investment and multi-unit properties |
| FHA | 80% | Mortgage insurance premiums apply; seasoning required |
| VA | Up to 100% in some cases | For eligible service members and veterans; lender limits may be lower |
Lenders may also set lower limits based on credit score, and all programs check that you can afford the higher payment. Our guide to refinance requirements covers credit and DTI standards.
What does a cash-out refinance cost?
You pay closing costs on the full new loan amount, not just the cash you take. Lender fees, title insurance, appraisal and government recording fees commonly add up to a few percent of the loan, though costs vary by state and lender. Cash-out loans may also carry pricing adjustments that raise the rate compared with a rate-and-term refinance.
Two cost questions matter most:
- Rate change on your existing balance. If your current rate is well below today's rates, refinancing the entire balance to get cash raises the cost of money you already borrowed.
- Total interest over time. Stretching a large new balance over 30 years can make the true cost of the cash much higher than it appears.
Our article on refinance closing costs breaks down each fee.
Good and risky uses of cash-out money
How you use the money determines whether a cash-out refinance helps or hurts your finances.
Uses that often make sense: - Major repairs or renovations that maintain or add value, such as a roof replacement or kitchen or bath update - Consolidating high-interest debt, if you address the spending that created it - Buying out a co-owner after a divorce or inheritance
Uses that deserve caution: - Vacations, cars or everyday spending - Investing in volatile assets - Covering an ongoing budget shortfall
Pros and cons of a cash-out refinance
| Pros | Cons |
|---|---|
| Often lower rates than credit cards or personal loans | Your home secures the debt; default can lead to foreclosure |
| One loan and one payment | Closing costs apply to the entire balance |
| Fixed-rate options provide predictable payments | Resets your loan term and amortization |
| Can combine with a rate reduction if market rates have fallen | Reduces equity, leaving less cushion if home values fall |
Cash-out refinance vs. other ways to tap equity
A cash-out refinance tends to fit best when you would benefit from refinancing anyway, such as when current rates are at or below your existing rate, and you need a large lump sum. When your first-mortgage rate is low or you need funds in stages, a HELOC or home equity loan is often cheaper. Our side-by-side guide on cash-out refinance vs. HELOC compares costs, flexibility and risk.
How to prepare for a cash-out refinance
A little preparation can improve both your odds of approval and your pricing:
- Estimate your usable equity realistically. Base it on recent comparable sales, not the highest estimate you can find online. A low appraisal shrinks the cash available.
- Check your credit and DTI. The larger payment must fit within the lender's debt-to-income limits, and a higher score can reduce pricing adjustments on cash-out loans.
- Decide how much you actually need. Borrowing the maximum means paying interest on money you may not use, and it leaves less equity as a cushion if home values dip.
- Get a total-cost comparison. Ask each lender for a Loan Estimate and compare the new payment, closing costs and total interest with what you pay today.
- Plan the money. If the cash is for a renovation, get contractor bids first so you borrow a realistic amount, with a reasonable contingency.
Also consider the impact on your long-term plans. A cash-out refinance late in your career or shortly before retirement can mean carrying a mortgage payment for longer than you intended. If paying off the home by a certain date matters to you, look at shorter terms or plan extra payments.
The bottom line
A cash-out refinance can be an efficient way to borrow a large sum against your home, especially when it also lowers your rate. Weigh the closing costs on the full balance, the rate on your existing debt and the risk of borrowing against your house. If your current rate is low, compare second-lien options first.
Frequently asked questions
How much cash can I get from a cash-out refinance?
Start with your home's appraised value, multiply by the lender's maximum loan-to-value ratio, and subtract your current balance and closing costs. For conventional and FHA loans, the maximum is commonly 80% of value. On a 400,000 dollar home with a 250,000 dollar balance, 80% is 320,000 dollars, so about 70,000 dollars is available before closing costs.
Is a cash-out refinance a good idea?
It can be when the new rate is similar to or lower than your current rate and you use the money for something with lasting value, such as a needed renovation. It is riskier when your current rate is much lower than today's rates, when you plan to sell soon, or when the cash funds spending that could recur. Compare it with a HELOC or home equity loan first.
Is cash-out refinance money taxable?
Cash from a refinance is loan proceeds, not income, so it generally is not taxed as income. Whether the mortgage interest on the cash-out portion is deductible depends on how you use the money and on current tax rules and limits, which generally favor funds used to buy, build or substantially improve the home. Ask a tax professional about your situation.
How long after buying a house can you do a cash-out refinance?
Conventional cash-out refinances commonly require about 12 months between your existing loan and the new one. FHA cash-out loans typically require you to have owned and lived in the home for at least 12 months with a solid payment history. VA rules differ. Your lender will confirm the exact seasoning requirement for your loan program.
Does a cash-out refinance have higher rates?
Often, yes. Lenders usually view cash-out loans as slightly riskier than rate-and-term refinances, so pricing adjustments can make the rate somewhat higher, especially at higher loan-to-value ratios or lower credit scores. The difference varies by lender and program, so compare cash-out offers side by side and against home equity alternatives.
Official Resources & Further Reading
Use these resources to check current guidance. Requirements and availability may vary by state and provider.
This guide is for general educational purposes and is not individualized financial, legal, tax or insurance advice. Product terms, rates and availability vary by provider and location. How we make money.
