Cash-Out Refinance: How It Works, Rates and Requirements

A cash-out refinance replaces your current mortgage with a larger loan, giving you the difference in cash. You can typically borrow up to 80% of your home’s value. If your home is worth $400,000 and you owe $250,000, you could access up to $70,000 in cash ($400,000 × 80% = $320,000 - $250,000 = $70,000). Rates run 0.125-0.5% higher than rate-and-term refinances.

How Cash-Out Refinance Works

The Basic Concept

1. Your home has equity (value exceeds what you owe)
2. You refinance to a new, larger mortgage
3. New loan pays off old mortgage
4. You receive the difference in cash

Example Transaction

Current situation:

• Home value: $450,000
• Mortgage balance: $300,000
• Equity: $150,000

Cash-out refinance:

• New loan amount: $360,000 (80% LTV)
• Pays off existing: $300,000
• Cash to you: $60,000
• New mortgage: $360,000

What You Can Use the Cash For

Common uses:

• Home improvements
• Debt consolidation
• College tuition
• Emergency fund
• Investment

Less advisable uses:

• Vacations
• Depreciating assets (cars, boats)
• Lifestyle expenses

Cash-Out Refinance Requirements

Equity Requirements

Loan Type	Maximum LTV	Minimum Equity Kept
Conventional	80%	20%
FHA	80%	20%
VA	100%	0% (full equity access)

Maximum cash calculation:

(Home value × Max LTV) - Current mortgage = Maximum cash

Credit Score Requirements

Score	Availability
720+	Best rates, all lenders
680-719	Good rates, most lenders
640-679	Higher rates, many lenders
620-639	Limited options, highest rates

Debt-to-Income Ratio

Standard DTI limits apply:

• Back-end: 43-45% typically
• May be lower for cash-out than rate-and-term

Seasoning Requirements

How long you’ve owned the property:

• Conventional: 6 months minimum
• FHA: 12 months minimum
• VA: 210 days (7 months) minimum

Documentation

Same as any refinance:

• 2 years tax returns
• 2 years W-2s
• 30 days pay stubs
• 2 months bank statements
• Current mortgage statement

Cash-Out Refinance Rates

Rate Premium

Cash-out rates are higher than rate-and-term:

Refinance Type	Typical Rate Premium
Rate-and-term	Baseline
Cash-out (LTV ≤ 60%)	+0.125%
Cash-out (LTV 60-75%)	+0.25%
Cash-out (LTV 75-80%)	+0.375-0.5%

Current Rate Example

If rate-and-term refinance is 6.5%:

• Cash-out at 70% LTV: ~6.75%
• Cash-out at 80% LTV: ~6.875-7.0%

Why Higher Rates?

More lender risk:

• Borrower has less equity (less skin in the game)
• Higher loan amount
• Historically higher default rates on cash-out

Cash-Out Refinance Costs

Closing Costs

Same as any refinance: 2-5% of loan amount

Cost	Typical Amount
Origination fee	0.5-1% of loan
Appraisal	$400-$700
Title insurance	$500-$1,500
Other fees	$1,000-$2,000

On $350,000 loan: $7,000-$17,500 in closing costs

Rolling Costs Into Loan

You can finance closing costs into your new mortgage:

• Increases loan amount
• Reduces cash received
• You pay interest on costs over loan term

Net Cash Calculation

New loan: $360,000 Payoff existing mortgage: $300,000 Closing costs (if financed): $10,000 Net cash to borrower: $50,000

Cash-Out vs Other Options

Cash-Out Refinance vs HELOC

Feature	Cash-Out Refinance	HELOC
Rate type	Fixed	Variable (usually)
Disbursement	Lump sum	Draw as needed
Payment	One mortgage	Two payments
Closing costs	Higher	Lower
Access to equity	Limited to 80%	Up to 80-85%

Choose cash-out if:

• Want fixed rate
• Need all cash upfront
• Current rate is acceptable
• Want single payment

Choose HELOC if:

• Need ongoing access
• Want lower upfront costs
• Current mortgage rate is good
• Need flexibility

Cash-Out vs Home Equity Loan

Feature	Cash-Out Refinance	Home Equity Loan
Replaces mortgage?	Yes	No (second mortgage)
Rate	One blended rate	Fixed second mortgage rate
Closing costs	Full refinance costs	Lower
Payment	One payment	Two payments

Choose home equity loan if:

• Your current mortgage rate is low
• You don’t want to restart your mortgage
• You need a fixed rate

Cash-Out vs Personal Loan

Feature	Cash-Out Refinance	Personal Loan
Collateral	Home	Unsecured
Rate	6-8% (typical)	10-25%
Term	15-30 years	2-7 years
Amount	High (based on equity)	Usually < $50,000
Risk	Home at risk	No collateral risk

Choose personal loan if:

• Small amount needed
• Don’t want to risk home
• Need money quickly
• Don’t have much equity

When Cash-Out Makes Sense

Home Improvements

Using equity to improve the home can:

• Increase home value
• Make interest potentially tax-deductible
• Create more equity long-term

ROI improvements: Kitchen, bathroom, energy efficiency

High-Interest Debt Consolidation

When it works:

• Credit card rates: 18-25%
• Cash-out rate: 7%
• Significant monthly savings

Example:

• $40,000 credit card debt at 22% = $733/month minimum
• Same debt at 7% over 30 years = $266/month
• Monthly savings: $467

Caution: Only works if you don’t run up cards again.

Investment Opportunities

Some investors use cash-out for:

• Investment property down payments
• Business investment
• Stock market (controversial—home as collateral for investments)

High risk. You’re leveraging your home for investment returns.

Emergency Fund Building

If you have no emergency fund, cash-out can create one. But consider:

• You’re paying interest to access your own equity
• Better to build savings organically if possible

When to Avoid Cash-Out

Your Rate Would Increase Significantly

If you have a 3% mortgage and cash-out rates are 7%, you’re raising the rate on your entire balance—not just the cash portion.

Better option: Home equity loan or HELOC at 8% on just the new money.

You’ll Use Cash Irresponsibly

If the cash will go to:

• Vacations
• Consumer spending
• Depreciating assets

You’re converting home equity to stuff that loses value.

You’re Restarting a Long Mortgage

If you’re 15 years into a 30-year mortgage and refinance to a new 30-year, you’ve added 15 years of payments.

Consider: Shorter term or current remaining term.

You Can’t Afford Higher Payment

Cash-out increases your loan balance, which may increase your payment. Ensure you can comfortably afford the new payment.

The Cash-Out Process

Step 1: Check Your Equity

Estimate home value (Zillow, Redfin, CMA from agent) and calculate potential cash:

(Estimated value × 80%) - Current mortgage = Max cash

Step 2: Shop Lenders

Get quotes from 3-5 lenders within 14-45 days. Compare:

• Interest rates
• Closing costs
• Loan terms

Step 3: Apply and Lock Rate

Submit application and documentation. Lock rate when comfortable.

Step 4: Appraisal

Lender orders appraisal to confirm home value. Cash available depends on appraised value.

Step 5: Underwriting

Underwriter reviews your file:

• Verifies income and employment
• Reviews credit
• Confirms property value
• Issues approval

Step 6: Closing

Sign documents and receive cash (typically 3 days after closing for rescission period).

Timeline

30-45 days typical. May be faster or slower depending on complexity.

Tax Implications

Interest Deductibility

Deductible if: Cash is used to “buy, build, or substantially improve” your home.

Not deductible if: Cash is used for other purposes (debt consolidation, education, etc.)

Example:

• Cash-out $50,000 for kitchen remodel: Interest deductible
• Cash-out $50,000 for debt consolidation: Interest not deductible

Limits

Mortgage interest is deductible on up to $750,000 of qualified residence debt (purchase or improvement).

Consult a tax professional for your specific situation.

Frequently Asked Questions

How much cash can I get from a cash-out refinance?

You can typically borrow up to 80% of your home’s value minus your current mortgage balance. VA loans allow up to 100% LTV.

Is a cash-out refinance a good idea?

It depends on the use. For home improvements or high-interest debt consolidation (with discipline), it can make sense. For discretionary spending, it’s generally not advisable.

What credit score do I need for cash-out refinance?

Minimum 620 for conventional, but 680+ gets better rates. The higher your score, the lower your rate.

How long does a cash-out refinance take?

30-45 days typically, similar to a regular refinance. Complex situations may take longer.

Are cash-out refinance rates higher?

Yes, typically 0.125-0.5% higher than rate-and-term refinance rates. Higher LTV (more cash out) means higher rate premium.

Can I do a cash-out refinance with bad credit?

Possible but difficult. FHA cash-out allows 580+ credit. Conventional typically requires 620+. Lower scores mean higher rates and may not make financial sense.

Is there a limit on how much I can cash out?

Yes. Conventional limits LTV to 80%. VA allows 100%. FHA limits to 80%. The dollar amount depends on your equity.