Is a Cash-Out Refinance a Good Idea?

A cash-out refinance can simplify your finances while giving you access to equity.

By replacing your current mortgage with a larger one and taking the difference in cash, you may be able to access lower-cost financing, simplify your debts, or invest in improvements that increase your home’s value.

At the same time, a cash-out refinance raises your loan balance, adds closing costs, and uses your home as collateral. Whether it is a good idea depends on your goals, budget, and how long you plan to stay in the home.

What Is a Cash-Out Refinance?

A cash-out refinance replaces your existing mortgage with a new, larger loan and pays you the difference in cash at closing. The amount you can borrow is based on your home’s current value and the lender’s loan-to-value limit, often abbreviated as LTV.

Loan-to-value represents how much of your home’s value is financed by the mortgage. Many cash-out refinance programs require you to leave a portion of equity in the home after refinancing, which limits how much cash you can take out. Many programs cap LTV at 80%, meaning you’ll be required to keep at least 20% equity in your home after the refinance.

You can use our cash-out refinance calculator to get an idea of what your monthly payment might look like. Keep in mind this calculator is illustrative only, and you'll need to connect with a loan officer to get personalized details. 

How a Cash-Out Refinance Works

The process begins with an application, where you provide information about your income, assets, debts, and how much cash you want to access. The lender orders an appraisal to determine your home’s market value and reviews your financial profile through underwriting.

If approved, you close on the new loan. Your existing mortgage is paid off, closing costs are settled, and the remaining funds are disbursed to you, typically as a lump sum shortly after closing.

From application to funding, a cash-out refinance usually takes several weeks, depending on appraisal timing and documentation.

Benefits of a Cash-Out Refinance

One of the main advantages of a cash-out refinance is access to lower-cost capital. Because the loan is secured by your home, interest rates are often lower than those on credit cards or unsecured personal loans.

A cash-out refinance also allows you to reset your mortgage. You can change your interest rate, adjust the loan term, or move from an adjustable rate to a fixed rate. This can simplify monthly budgeting and provide payment stability, since the equity you take is lumped in with your mortgage into one monthly payment.

Some homeowners use cash-out funds for renovations that improve livability or reduce long-term costs, such as energy upgrades. Others use the proceeds to consolidate higher-interest debts into a single monthly payment.

Risks and Drawbacks to Consider

A cash-out refinance ultimately means taking on a larger mortgage balance.

Increasing your loan amount can raise your monthly payment or extend the time it takes to pay off your home, which may increase total interest paid over the life of the loan.

Closing costs are another consideration. Cash-out refinances typically involve upfront fees that often fall in the low single-digit percentage range of the loan amount. These costs must be recovered through savings or other benefits for the refinance to make sense.

Because your home secures the loan, missed payments can put the property at risk. Using home equity for short-term or discretionary spending can also undermine long-term financial stability if not carefully planned.

You can use our refinance break-even calculator to get an idea of how long it’ll take you to recoup your costs, even with cash-out.

When a Cash-Out Refinance Makes Sense

A cash-out refinance is more likely to be a good idea when you have substantial equity, stable income, and a disciplined plan for the funds. Common examples include financing renovations that add value, consolidating high-interest debt with a clear payoff strategy, or improving the structure of your existing mortgage.

It can also make sense if the refinance lowers your interest rate or helps you move into a loan term that better fits your financial timeline.

When to Be Cautious

Caution is warranted if the refinance would leave you with very little equity, if you plan to sell the home before recovering closing costs, or if resetting to a longer term would significantly increase total interest paid.

A cash-out refinance may also be a poor fit if you only need a small amount of money or short-term access to funds. In those cases, alternatives may offer more flexibility with less impact on your primary mortgage.

Alternatives to a Cash-Out Refinance

A cash-out refinance isn’t the only way to tap your home equity.

Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against your equity without replacing your existing mortgage. These options can be useful for smaller projects or ongoing access to funds, though rates and payment structures differ.

They’re also a strong option if you want to access your equity without changing your existing mortgage. If you already have a great rate or terms you like, a HELOC or home equity loan might be a better option to access your equity.

Unsecured borrowing, like personal loans, may be appropriate for short-term needs, but that typically comes with higher interest rates and shorter repayment periods.

The Bottom Line

A cash-out refinance can be a good idea if you want to both refinance your existing mortgage and access your home equity. If you have a clear use for the funds and can accommodate a higher mortgage balance, a cash-out refinance is a strong option for simplifying your finance.

Frequently Asked Questions

What Credit Score Is Needed for a Cash-Out Refinance?

Many lenders look for credit scores in the low 600s or higher, with stronger credit profiles qualifying for better pricing.

How Does a Cash-Out Refinance Affect Monthly Payments?

Payments may increase, decrease, or stay similar depending on the new loan balance, interest rate, and term. Comparing scenarios before committing is essential.

Can a Cash-Out Refinance Be Used for Debt Consolidation?

Yes. Many homeowners use cash-out refinances to consolidate higher-interest debts, but success depends on avoiding new debt after refinancing.

What Are Typical Closing Costs?

Closing costs often range in the low single digits as a percentage of the loan amount. These should be factored into any break-even calculation.

How Long Does a Cash-Out Refinance Take?

Most cash-out refinances close within several weeks, though timelines vary based on appraisal and underwriting.