Cash-Out Refinance: Turn Your Home Equity Into Cash
A cash-out refinance replaces your existing mortgage with a larger loan, allowing you to receive the difference as cash. It is one of the most cost-effective ways to access large sums of money, thanks to mortgage-level interest rates that are significantly lower than credit cards or personal loans.
How Cash-Out Refinancing Works
In a cash-out refinance, you take out a new mortgage for more than you currently owe. The new loan pays off your existing mortgage, and you receive the extra amount as a lump-sum payment at closing.
For example, if your home is worth $400,000 and you owe $200,000, you might refinance for $280,000. After paying off your existing $200,000 mortgage, you receive $80,000 in cash (minus closing costs).
The new loan becomes your primary mortgage with new terms, including a potentially different interest rate and loan term. Your monthly payment will likely increase because you are borrowing more money.
Cash-Out Refinance vs. Home Equity Loan
Both options let you access home equity, but they differ in important ways:
- Cash-out refinance replaces your existing mortgage entirely. You end up with one loan, one payment, and one interest rate. This simplifies your finances and can lock in a lower rate if market rates have dropped.
- Home equity loan or HELOC is a separate loan on top of your existing mortgage. You keep your current mortgage terms and add a second payment. This is better when your existing mortgage rate is low and you do not want to lose it.
If your current mortgage rate is significantly below market rates, a home equity product may be more cost-effective. If rates are similar or lower, a cash-out refinance consolidates everything into one loan.
Eligibility and Requirements
To qualify for a cash-out refinance, you generally need:
- At least 20% equity remaining in your home after the cash-out. Most lenders cap the loan-to-value ratio at 80%, meaning you can borrow up to 80% of your home's value.
- Credit score of 620 or higher for conventional loans. FHA cash-out refinances may accept lower scores. VA cash-out refinances are available to eligible veterans with no equity requirement.
- Stable income and employment documented through pay stubs, W-2s, and tax returns.
- Debt-to-income ratio of 43% or less after factoring in the new, larger mortgage payment.
Investment properties require more equity, typically 25% to 30% remaining, and carry higher interest rates than primary residences.
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Best Uses for Cash-Out Refinance Funds
While you can use the cash for any purpose, certain uses provide better financial returns:
- Home improvements that increase property value, such as adding a bathroom, finishing a basement, or updating the kitchen. These improvements can offset the added debt by boosting your home's worth.
- High-interest debt consolidation can save thousands in interest by replacing credit card debt (15% to 25% APR) with mortgage debt (6% to 8% APR).
- Investment property purchases allow you to use equity from one property to fund a down payment on another.
- Education expenses or business investments can be funded at mortgage rates, which are typically lower than student loans or business loans.
Avoid using cash-out funds for depreciating assets or discretionary spending, since you are putting your home at risk as collateral.
Questions borrowers ask us first.
Short answers to the things we hear most when homeowners and buyers are weighing their mortgage options.
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How much cash can I take out in a refinance?
Most lenders allow you to borrow up to 80% of your home's value. On a $400,000 home, that is $320,000. If you owe $200,000, you could receive up to $120,000 in cash, minus closing costs. VA loans may allow up to 100% LTV for eligible veterans.
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Are cash-out refinance rates higher than regular refinance rates?
Yes, cash-out refinance rates are typically 0.125% to 0.5% higher than rate-and-term refinance rates. The rate premium reflects the additional risk the lender takes on with a larger loan amount.
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Is cash-out refinance interest tax-deductible?
Interest is tax-deductible if the cash-out funds are used to buy, build, or substantially improve the home securing the loan. Interest on funds used for other purposes, like debt consolidation, is generally not deductible. Consult a tax advisor.
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How long does a cash-out refinance take?
Expect 30 to 45 days from application to closing. The process includes an appraisal, title search, and underwriting. Some lenders can close faster with streamlined processing.
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Can I do a cash-out refinance on an investment property?
Yes, but requirements are stricter. Most lenders require 25% to 30% equity remaining after the cash-out, a credit score of 680 or higher, and may limit the loan-to-value ratio to 70% to 75%.