How Does a Cash-Out Refinance Work?

A cash-out refinance allows you to replace your current mortgage with a new, larger loan and receive the difference in cash at closing.

That means the lender pays off your existing mortgage and gives you a lump sum based on your available home equity, subject to program limits and qualification requirements.

Homeowners commonly use cash-out refinances to consolidate high-interest debt, fund home renovations, or cover large expenses while staying in the same home.

Because the loan is secured by your property, interest rates are often lower than those on personal loans or credit cards. The trade-off is a higher mortgage balance and closing costs.

Cash-Out Refinance Calculator

A cash-out refinance replaces your existing mortgage with a larger loan and pays you the difference in cash at closing.

The amount you receive equals the new loan balance minus what you still owe on your current mortgage, minus closing costs and prepaid items.

For example, if your home is worth $400,000 and you owe $200,000, and your lender allows borrowing up to 80 percent loan-to-value, the maximum new loan would be $320,000. After paying off the existing $200,000 balance, you could receive up to $120,000 in cash before fees and prepaids.

You can use our calculator to explore cash-out refinance scenarios. Keep in mind this calculator is illustrative only, and you'll need to connect with a loan officer to get personalized details. 

A Step-By-Step Guide to Getting a Cash-Out Refinance

Step 1: Check Your Eligibility for a Cash-Out Refinance

The first step is estimating your home equity. Start with your home’s current market value and subtract your outstanding mortgage balance. While this gives a rough estimate, lenders will limit how much of that equity you can access.

Eligibility typically depends on several factors. Most lenders require sufficient remaining equity after the refinance, stable income, and a manageable debt-to-income ratio.

Credit score requirements vary by loan type, but many conventional programs look for scores around the low 600s or higher. Property type also matters, as investment properties and multi-unit homes often face stricter limits than primary residences.

Loan-to-value ratio is central here. It represents how much of your home’s value you are allowed to borrow, including your existing mortgage balance and the new loan.

Step 2: Compare Cash-Out Refinance Rates and Costs

Shopping around can significantly affect your total cost. Interest rates, APRs, and closing costs vary by lender, credit profile, loan size, and property type. Reviewing multiple loan estimates helps you understand the real cost of borrowing over time.

Closing costs often include lender fees, appraisal, title services, credit report charges, and recording fees. Some lenders allow eligible costs to be rolled into the new loan, which reduces upfront cash but increases the loan balance and total interest paid over time.

When comparing offers, focus on the full picture, including rate, APR, fees, and estimated monthly payment, rather than choosing based on rate alone.

Step 3: Apply, Complete Appraisal, and Undergo Underwriting

Once you apply, the lender reviews your income, assets, debts, and credit. You will submit documentation such as pay stubs, tax returns, bank statements, and identification. The lender orders an appraisal to confirm your home’s current value and conducts a title search to verify ownership and liens.

Underwriting evaluates whether the loan meets program guidelines and lender requirements. This stage can surface conditions related to income verification, debt ratios, or property value. Responding quickly to requests helps keep the process moving.

From application to closing, cash-out refinances typically take several weeks, though timelines vary based on appraisal speed and documentation.

Step 4: Close the Loan and Receive Your Cash

At closing, you review and sign final documents, including the Closing Disclosure. Your old mortgage is paid off, and your cash-out funds are disbursed, often by wire transfer or bank check after any required waiting period.

The funds can generally be used for any lawful purpose, including home improvements, debt consolidation, or major expenses. Because the money is loan proceeds rather than income, it is usually not treated as taxable income, though individual tax situations vary.

When a Cash-Out Refinance Makes Sense

A cash-out refinance can be a strong option when you have substantial equity, stable income, and a clear use for the funds. Common scenarios include consolidating high-interest debt into a lower-rate mortgage, investing in value-adding home improvements, or funding large planned expenses.

It can also be useful when the refinance improves your overall loan structure, such as moving to a fixed rate or adjusting the term to better fit your budget.

Risks and Trade-Offs to Consider

A larger loan balance reduces your equity and increases financial exposure. Higher payments or longer terms can increase total interest costs over time. Because your home secures the loan, missed payments can ultimately put the property at risk.

Higher loan-to-value ratios may also trigger higher pricing adjustments or mortgage insurance, depending on the program. A refinance typically involves a hard credit inquiry, which can cause a small, temporary drop in your credit score.

Understanding these trade-offs is critical before proceeding.

Practical Tips for a Successful Cash-Out Refinance

Before applying, compare multiple lender offers and model different loan terms. Decide how much cash you actually need rather than borrowing the maximum available. Keep an equity buffer whenever possible.

Prepare documentation early and review estimates carefully. Pressure-test your budget to ensure the new payment fits comfortably alongside taxes, insurance, and other obligations.

The Bottom Line

A cash-out refinance works by replacing your existing mortgage with a new, larger loan and letting you take a portion of your equity as cash. It’s a common option for homeowners who want to both change their rate and access their equity, but can mean a higher monthly payment.

Frequently Asked Questions

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

A regular refinance changes your interest rate or loan term without increasing the loan amount. A cash-out refinance increases the loan balance and provides cash from your home equity.

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

The amount depends on your home’s value, existing mortgage balance, and the program’s loan-to-value limits. Many conventional programs allow borrowing up to about 80 percent of the home’s value.

What Credit Score Is Typically Required?

Many lenders look for credit scores in the low 600s or higher for conventional cash-out refinances. Stronger credit profiles generally qualify for better rates.

How Long Does the Process Take?

Most cash-out refinances take several weeks from application to closing, depending on appraisal timing and documentation.

Can I Use the Cash for Any Purpose?

In most cases, yes. Cash-out refinance proceeds can be used for renovations, debt consolidation, investments, or other major expenses.