If you have accumulated equity in your home, you may be wondering how to leverage it without selling. A cash-out refinance allows you to replace your existing mortgage with a new, larger mortgage and receive the difference in cash.
This Redfin article explains what a cash-out refinance is, how it works, its pros and cons, and if it makes sense for you. Whether you’re renovating your home in Austin, Texas, or consolidating your debt in Los Angeles, California, understanding this financing option can help you make smarter financial decisions.
How does a cash-out refinance work?
In a cash-out refinance, your current mortgage is replaced with a new loan that is larger than the amount you owe. The difference between the old loan balance and the new loan balance will be paid in cash.
Example: If your home is worth $400,000 and you owe $250,000, you can refinance it to $320,000. After closing costs, you’ll receive approximately $70,000 in cash, while your mortgage balance will be $320,000.
Lenders typically allow you to borrow up to 80% of the home’s value, but the exact limit depends on your credit score, income, and loan type.
Common uses for cash-out refinancing
Homeowners use cash-out refinances for a variety of reasons, including:
Home Improvements: Remodel your kitchen, add a bathroom, or make energy-efficient upgrades. Debt Consolidation: Pay off high-interest credit cards and personal loans. Educational or medical expenses: Can help fund tuition or cover unexpected expenses. Investment: Buy investment property or expand your portfolio. Emergency Fund: Build financial flexibility with a safety cushion.
Cash-out refinance eligibility requirements
The exact requirements vary by financial institution, but most financial institutions require the following:
Requirements Typical Criteria Credit score for conventional loans 620+ (higher for highest interest rates) Home equity At least 20% after refinancing Debt-to-income (DTI) ratio 43% or less Loan-to-value (LTV) ratio Up to 80% (some VA loans can go up to 90%) Seasoning period Usually 6 months or more after the last mortgage closed
Types of cash-out refinance loans
A variety of loan programs offer cash-out refinance options, each with their own eligibility requirements, benefits, and limitations. A comparison of the main types is as follows.
1. Traditional cash-out refinance
Traditional cash-out refinancing is the most common type and is offered by private lenders without government assistance. Typically, this is best suited for borrowers with a high credit score, steady income, and at least 20% equity in their home.
Main features:
Borrow up to 80% of the home’s appraised value (loan-to-value ratio). Flexible loan terms (usually 15 or 30 years), fixed or variable interest rates. There is no upfront mortgage insurance, but private mortgage insurance (PMI) is available for borrowings over 80% LTV. Ideal if you’re looking for a competitive interest rate and plan to remain in your home long enough to offset closing costs.
Perfect for: Homeowners with strong credit and at least 20% equity who want a simple, low-cost way to leverage their home equity.
2. FHA Cash Out Refinance
FHA cash-out refinances are insured by the Federal Housing Administration (FHA), making it easier to qualify even if you have a low credit score or equity. However, FHA loans include a mortgage insurance premium (MIP), which increases the total cost.
Main features:
Minimum credit score is 620 (although some lenders may approve lower scores). You can borrow up to 80% of the home’s value based on the appraisal. Regardless of your equity level, both upfront and annual mortgage insurance is required. You must have lived in the property as your primary residence for at least 12 months.
Great for: Homeowners who don’t qualify for a traditional loan due to limited credit or equity, but still want to tap into their home equity for repairs, debt consolidation, or major expenses.
3. VA Cash Out Refinance
VA Cash Out Refinance is sponsored by the U.S. Department of Veterans Affairs and is designed for eligible military personnel, veterans, and surviving spouses. It’s one of the most flexible options available, allowing eligible borrowers to leverage up to 100% of their home’s value.
Main features:
You can borrow up to 100% LTV. This is the best of all refinance programs. Private mortgage insurance (PMI) is not required. It can be used not only for existing VA loans, but also for refinancing existing loan types into VA loans. You must meet the eligibility and occupancy requirements for VA services (your home must be your primary residence).
Ideal for: Eligible veterans or active duty military who are looking to refinance or access home equity on favorable terms without PMI.
Pro tip: If you qualify for both FHA and VA loans, compare closing costs, insurance premiums, and interest rate options. VA loans typically have lower overall costs, while FHA loans are easier to qualify for.
How much does a cash-out refinance cost?
Like the original mortgage, cash-out refinances have closing costs, typically 2% to 5% of the new loan amount. These fees cover administrative and legal costs associated with issuing a new mortgage.
Common closing costs include:
Loan origination fee: Charged by the lender to process a new mortgage (usually 0.5% to 1% of the loan). Appraisal fee: Your lender will require an appraisal of your new home to determine the current market value. Title search and insurance: Ensures clear title and protects the lender in the event of a title dispute. Credit report and underwriting fee: Covers the lender’s cost of verifying your creditworthiness and finalizing approval. Recording fees and taxes: Charged by local authorities to record a new mortgage.
These costs can be paid upfront at closing or rolled into your new loan balance, but doing so will increase your total monthly payments and interest expense slightly over time.
Example: If you refinance a $300,000 mortgage with 3% closing costs, you’ll pay approximately $9,000 in fees. Once you incorporate these into your loan, your new balance will be $309,000.
Cash-out Refinance vs. Home Equity Loan vs. HELOC
Features Cash-out refinance Home equity loan HELOC Structure Replaces an existing mortgage Adds a second loan Revolving line of credit Interest rate Usually fixed Fixed Variable payments Lump-sum payment at closing Lump-sum payment Withdrawal as needed Ideal for large one-time expenses Predictable expenses Recurring or uncertain expenses
Advantages and disadvantages of cash-out refinancing
Strong Points
Low interest rates: Mortgage interest rates are often lower than interest rates on personal loans and credit cards. Simplify payments: Replace multiple debts with one monthly payment. Potential tax benefits: Mortgage interest may be tax deductible if used for home improvements (please consult your tax advisor).
Cons
Closing costs: Typically 2% to 5% of the loan amount. Reset your mortgage term: Extending the term can increase the total interest paid. Foreclosure risk: Your home serves as collateral for your loan. If you fail to pay, you may be at risk.
When does a cash-out refinance make sense?
A cash-out refinance may be worth it if:
You can get a lower interest rate than your current home loan. Home renovations with a high ROI require capital. You want to consolidate your high-interest debt into one low-interest payment.
However, if the new rate is higher than your existing rate, or if you plan to sell your home soon, it’s less ideal because the closing costs may outweigh the short-term benefits.
>>Read: Should you refinance your mortgage?
Alternatives to cash-out refinance
If you’re not sure if a cash-out refinance is right for you, consider the following:
Home Equity Loan: Keep your existing mortgage and add a second fixed rate loan. HELOC (Home Equity Line of Credit): Provides flexible withdrawals when needed. Personal Loan: An unsecured option that does not affect your home equity. 0% APR Credit Card Offer: Short-term financing for small projects.
>>Read: How to calculate home equity
Frequently asked questions about cash-out refinancing
1. Can I get a cash advance refinance even if I have bad credit?
It’s possible, especially with FHA loans, but you’ll likely pay higher interest rates and require more capital.
2. How long does a cash-out refinance take?
Typically takes 30-45 days, depending on lender processing, appraisal, and documentation.
3. Does a cash-out refinance affect my taxes?
The cash received is generally not taxable, but mortgage interest is deductible only if the funds are used to improve the home.
