What is a Cash-Out Refinance?

A cash-out refinance is unique in that it both lets you tap into your home’s equity and change your mortgage rate.

It lets you replace your current mortgage with a new, larger one and take the difference as cash. That means you convert part of your home equity into liquid funds that can be used for home improvements, debt consolidation, or other major expenses.

But a cash-out refinance comes with important caveats: Unlike a standard rate-and-term refinance, a cash-out refinance increases your loan balance.

Read on to learn more about cash-out refinances.

Cash-Out Refinance Basics

A cash-out refinance is a mortgage transaction that replaces your existing home loan with a new, larger mortgage and pays you the difference in cash at closing. The funds come from your home equity, which is the portion of the property you own outright.

That’s different from a standard refinance, which typically keeps the loan amount the same and focuses on lowering the interest rate, adjusting the loan term, or both.

Home equity is calculated by subtracting your current mortgage balance from your home’s appraised value. Loan-to-value, often called LTV, represents how much of that value you are borrowing. Closing costs include fees required to complete the new loan and may be paid upfront or rolled into the mortgage.

How a Cash-Out Refinance Works

The cash-out refinance process follows the same general steps as a traditional mortgage refinance.

You apply and submit documentation related to income, assets, debts, and the property. The lender orders an appraisal to determine your home’s current market value. Based on that value, the lender calculates how much equity you have and how much you can borrow. Underwriting then reviews your credit, income, debts, and property details.

If approved, the lender finalizes the new loan amount, interest rate, term, and cash-out amount. At closing, your existing mortgage is paid off and you receive the remaining funds as a lump sum. Most cash-out refinances close within 30 to 45 days.

Cash-Out Refinance Calculator

You can use our calculator below to explore different cash-out refinance scenarios. Keep in mind this calculator is illustrative only, and you’ll need to connect an expert to get personalized details.\

Eligibility and Qualification Requirements

To qualify for a cash-out refinance, lenders evaluate several factors. These typically include your credit score and credit history, debt-to-income ratio, stable income, available home equity, and mortgage payment history. Property type and occupancy also matter, as requirements can differ for primary residences, second homes, and investment properties.

Many conventional cash-out refinance programs look for a minimum credit score around 620, though stronger credit profiles often qualify for better rates. Government-backed programs may offer different eligibility standards depending on the loan type.

Loan-to-Value Limits and the Role of the Appraisal

Loan-to-value limits play a central role in determining how much cash you can access. Conventional cash-out refinances often cap LTV at around 80 percent, meaning you must leave at least 20 percent equity in the home.

Because the appraisal sets the value baseline, a higher appraisal can increase available cash, while a lower appraisal may limit or eliminate the cash-out option.

Quick LTV Example

If your home appraises at $400,000 and the maximum allowed LTV is 80 percent, the largest possible loan would be $320,000. If your current mortgage balance is $240,000, the maximum potential cash before closing costs would be $80,000.

Common Uses and Benefits of a Cash-Out Refinance

Homeowners use cash-out refinances for a variety of reasons. Common uses include funding home renovations, consolidating high-interest debt, covering education expenses, investing in a business, or assisting with the purchase of another property.

One potential benefit is replacing higher-interest debt with mortgage debt that may carry a lower rate and longer repayment term. A cash-out refinance also provides a single lump sum at closing and may allow borrowers to move into a more stable loan structure, such as a fixed-rate mortgage.

Risks and Considerations

A cash-out refinance increases your mortgage balance and reduces your equity cushion. If your financial situation changes or home values decline, this can increase risk.

Other considerations include higher monthly payments, restarting or extending the loan term, and paying more interest over time. Adjustable-rate options may introduce payment uncertainty in the future. Borrowers should carefully evaluate how much cash they truly need and consider worst-case scenarios before proceeding.

Cash-Out Refinance Costs and the Closing Process

Closing costs for a cash-out refinance typically range from about 2 percent to 5 percent of the loan amount. These costs may include lender fees, appraisal and credit report charges, title services, recording fees, and prepaid items such as interest and insurance escrows.

The closing process usually follows a predictable sequence. You prepare and submit documentation, complete the application and credit review, undergo appraisal and underwriting, lock your rate, satisfy final conditions, and close the loan. At closing, the old mortgage is paid off and cash is disbursed.

Cash-Out Refinance vs. Home Equity Loans and HELOCs

A cash-out refinance replaces your primary mortgage, while home equity loans and HELOCs add a second loan. Each option has different costs, risks, and flexibility depending on your financial goals.

The Bottom Line

A cash-out refinance both replaces your mortgage and lets your access a portion of your equity as cash. It's a strong option if you want to both refinance and tap into your equity, but is usually subject to loan-to-value caps. 

Frequently Asked Questions

What Is the Difference Between a Cash-Out Refinance and a Regular Refinance?

A regular refinance keeps the loan amount roughly the same and focuses on changing the rate or term. A cash-out refinance increases the loan amount and provides cash from your home equity.

How Much Cash Can I Get From a Cash-Out Refinance?

Many conventional programs allow borrowing up to about 80 percent of your home’s appraised value, minus your existing loan balance and closing costs.

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

Many lenders look for a minimum credit score around 620 for conventional cash-out refinances, with higher scores generally qualifying for better pricing.

Are There Tax Implications?

The cash received is usually not taxed as income because it is loan proceeds. Tax treatment can vary, so it is important to consult a qualified tax professional.

How Long Does a Cash-Out Refinance Take?

Most cash-out refinances take about 30 to 45 days from application to closing, depending on documentation, appraisal timing, and underwriting.