Cash-Out Refinance: How It Works and When to Do It
A cash-out refinance allows you to replace your current mortgage and access a lump sum of cash at the same time. You can use the payout for anything you’d like, from debt consolidation to remodeling an outdated kitchen.
Key takeaways
- A cash-out refi involves borrowing more than you currently owe.
- You’ll typically need at least 20% equity in your home to qualify.
- Cash-out refinance requirements are stricter than for a traditional refinance.
- Your monthly mortgage payment will likely increase.
What is a cash-out refinance?
A cash-out refinance is when you replace your current mortgage with a larger loan and receive the difference in cash. Two important things to remember:
- The amount you can borrow is based on the amount of equity you have in your home.
- You typically can’t borrow all of your home’s equity.
Lenders calculate your home equity by subtracting your loan balance from your home’s appraised value. They also limit how much you can cash out by setting loan-to-value (LTV) ratio requirements. Most lenders set an 80% LTV limit, meaning you can borrow up to 80% of your home’s value.
How much can you borrow with a cash-out refinance?
Use LendingTree’s cash-out refinance calculator to find out your estimated monthly payments and the amount of cash you could walk away with. Follow these steps to get started:
- Enter your home value. A home value estimator can help you get a rough idea of how much your home is worth.
- Put in your current mortgage balance. You can find this on your most recent mortgage statement.
- Add the amount of cash you’d like to take out. If you enter too large an amount, the calculator will let you know.
Let’s say your home is worth $450,000 and you owe $300,000 on your existing mortgage. This means you have $150,000 in home equity. Here’s how to determine your cash-out refinance payout:
- Multiply your home’s value by the 80% LTV limit: $450,000 x 0.80 is $360,000. This is your maximum loan amount.
- Subtract your current mortgage balance: $360,000 – $300,000 is $60,000.
You could pocket $60,000 if you do a cash-out refinance.
How does a cash-out refinance work?
For the most part, a cash-out refinance works like any other home loan. You shop for a mortgage lender, fill out a loan application and qualify based on your credit, income and assets. However, there are a few extra considerations:
- You must qualify for a higher loan amount. Because you’re taking out a new loan for more than you currently owe, your lender will need to verify your ability to afford a larger loan amount and higher monthly payment.
- You’ll pay for a home appraisal. Until a refinance home appraisal is completed, your cash-out refi loan amount is just an estimate. If your appraisal comes back lower than expected, you may not qualify to borrow as much home equity as you’d hoped.
- Your lender finalizes your cash-out refinance loan amount. Once your appraisal comes back, the lender calculates your cash-out amount by subtracting your current loan balance from the final loan amount.
- Your old loan is paid off and you receive the rest of the money in cash. Once you review your closing disclosure to confirm the final figures and sign your closing papers, your lender will fund your loan. Your old mortgage is paid off, the new mortgage is secured by your home and a wire or check is sent to you.
Cash-out refinance closing costs
Refinance closing costs typically range from 2% to 6% of your loan amount, depending on your loan size. You’ll pay the same types of fees for a cash-out refinance as a purchase mortgage, which includes origination, title, appraisal and credit report costs.You can pay cash-out refinance closing costs out of pocket or request the lender deduct them from your payout. Some companies offer no-closing-cost refinance options if you accept a higher interest rate in exchange for having your lender pay your costs.
- Conventional cash-out refinances don’t require private mortgage insurance (PMI).
- FHA cash-out refinances come with FHA mortgage insurance regardless of your LTV ratio.
- VA cash-out refinances don’t require mortgage insurance, but you’ll have to pay the VA funding fee of 2.15% to 3.3% of the loan amount.
Cash-out refinance requirements
| Conventional | FHA | VA | |
|---|---|---|---|
| Maximum LTV ratio | 80% | 80% | 90% |
| Minimum credit score | 640 | 500 | No minimum (but many lenders require 620) |
| Maximum DTI ratio | 45% to 50% | 43% | 41% |
Maximum 80% LTV ratio
A maximum 80% LTV ratio is the standard for both FHA and conventional mortgages. However, there is one major exception: Eligible military homeowners can typically borrow up to 90% of their home’s value with a VA cash-out refinance.
Minimum 640 credit score
Conventional cash-out refinance guidelines require a 640 score. Meanwhile, the VA doesn’t set a minimum score, but many lenders also set their own at 620. FHA loans are the exception, and borrowers may qualify with scores as low as 500.
Learn more about FHA cash-out refinances.
Maximum 50% DTI ratio
Lenders divide your total monthly debt by your income to determine your debt-to-income (DTI) ratio. They prefer borrowers not exceed a 43% DTI ratio, but you may be able to go up to a 50% DTI with your cash-out refinance. If you have a high DTI ratio, a high credit score and extra cash in the bank may help your approval odds.
Occupancy
You can borrow an FHA or VA cash-out refinance loan only for a home you will live in as your primary residence. Conventional loans allow you to borrow against equity in a second home or investment property refinance, if you’re willing to borrow less and pay higher rates.
Number of units and property type
You’ll get the most cash out of a single-family home. Lenders apply lower LTV ratio limits to multifamily homes with two to four units. Lenders may also charge extra fees or higher rates to borrow equity from a condo or manufactured home refinance. Some may even restrict the cash-out LTV ratio on these property types.
Waiting period
If you recently purchased your home, you’ll generally need to adhere to the following waiting periods before you can do a cash-out refinance:
- FHA: 12 months
- Conventional: 12 months
- VA: 210 days (about seven months)
Loan limits
Your cash-out refinance loan is subject to conventional loan limits and FHA loan limits, which are based on median home prices and change annually. Loan limits don’t apply to most VA loans, though lenders may set their own maximums.
The 2025 loan limits for single-family homes are $806,500 for conventional loans and $524,225 for FHA loans.
Cash-out refinance pros and cons
| Pros | Cons |
|---|---|
Flexibility. You can use the funds for any purpose, including consolidating debt, investing in real estate or starting a business. Low interest rates. Mortgages typically have lower interest rates than credit cards, personal loans and home equity loans. One monthly payment. Since a cash-out refinance replaces your current mortgage, you won’t have to worry about extra monthly payments like you would with a second mortgage, such as a home equity loan. | 20% equity required. If home values have tumbled in your area or you bought your home with a small down payment, a cash-out refinance may not be possible, at least not right now. Loss of equity. Borrowing against your home equity now may mean a smaller profit when you sell your home later. Higher payments. In most cases, a higher loan amount will mean a higher monthly mortgage payment for as long as you own your home. Closing costs. You’ll need to pay various closing costs to get a cash-out refinance loan, including origination and appraisal fees. |
How to get the best cash-out refinance rates
Cash-out refinance rates are generally higher than those offered on regular refinances. Turning equity into debt increases the odds you could lose your home to foreclosure, and lenders pass this risk on to you with higher rates.
Here are four steps you can take to get the best rates:
1. Raise your credit score
Your credit score has a major impact on cash-out refinance rates. A 780 score or higher can get you the lowest rates on a conventional cash-out refinance. Although the minimum requirements are lower for FHA loans, your FHA interest rate is still affected by your credit score.
Paying off credit card balances and avoiding opening new credit accounts can help you improve your credit score. The extra effort could save you thousands of dollars in interest charges over a 30-year loan term.
Need help finding or understanding your score? Get help and see your free credit score for LendingTree Spring.2. Borrow less
Your LTV ratio, which measures how much you’re borrowing compared to your home’s value, is another factor that impacts your cash-out refinance rate. The higher your LTV ratio, the higher your rate will be. One way to borrow less money is by paying down your mortgage principal with a lump sum before refinancing. This can also help make your monthly payments more affordable.
Read more about how much you should put down on a house.
3. Make home improvements
The right home improvements could increase your home’s value, lower your LTV ratio and lead to a lower cash-out refinance rate. Check Remodeling magazine’s most recent Cost vs. Value Report to learn which improvements give you the best return on every dollar you invest.
4. Shop around for lender offers
Mortgage shoppers save serious money versus those who don’t shop around, according to LendingTree data. Collect loan estimates from three to five lenders or use an online comparison site and compare the annual percentage rates (APRs) and interest rates to find your best offer.
Check out our list of the best refinance lenders.
Cash-out refinance alternatives
Cash-out refinance vs. HELOC
A home equity line of credit (HELOC) is an alternative way to access cash that’s secured by your home. One advantage of HELOCs is that most HELOC lenders allow you to borrow up to 85% of your home’s value. Some HELOC lenders will even lend up to 100% — much more than the 80% cap on most cash-out refinances.
HELOCs work a lot like a credit card: You can swipe a card to use the funds and pay off those charges as you go.
| A HELOC makes sense if: | A cash-out refinance makes sense if: |
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Find out how much home equity you can borrow
Our home equity loan and HELOC calculator can help you estimate how much money you can qualify for based on your home’s value and your outstanding mortgage balance.
Cash-out refinance vs. home equity loan
Another equity-tapping option is a home equity loan, which will give you access to funds secured against a portion of your home equity. You’ll receive all the funds at once and repay the loan on a fixed payment schedule. Terms often range from five to 30 years.
Like HELOCs, home equity lenders may set LTV ratios up to 100%, though most keep the maximum at 85%.
| A home equity loan makes more sense if: | A cash-out refinance makes more sense if: |
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Compare rates for a cash-out refinance vs. home equity products
Is a cash-out refinance a good idea?
Whether a cash-out refinance is a good option depends on your financial situation and how you plan to use the funds. If your credit is better than it was when you got your existing mortgage, refinancing could help you get a better interest rate. If you plan to use the payout for home improvements that could increase your property’s value, refinancing might be a good investment.
However, doing a cash-out refinance to buy a boat, take a vacation or make other non-essential purchases is not the best idea, as there are little to no financial returns.
Frequently asked questions
Yes, FHA cash-out refinances are a legitimate loan product insured by the Federal Housing Administration (FHA).
Yes, if you qualify. However, you’ll be limited to a lower LTV ratio and should expect a higher interest rate. Lenders limit the LTV ratio for cash-out refinances on investment properties to 75%, meaning you’ll need at least 25% equity after closing.
Cash-out refinance rates are typically higher than traditional refinance rates. This is because lenders consider cash-out refinances to be a riskier mortgage product. However, your specific rate will depend on various factors, including your financial situation and market conditions.
Cash-out refinance closing costs and fees are typically 2% to 6% of your loan amount. That means if you take out a $300,000 loan, you could pay up to $18,000 in fees alone.
The amount of cash you can borrow depends on your chosen loan program’s maximum LTV ratio. For example, you can borrow up to 80% of your home’s value with a conventional cash-out refinance.