Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new, larger loan. You borrow more than you currently owe, and the difference between your old loan balance and the new loan amount is paid to you in cash at closing.

For example: your home is worth $500,000 and you owe $280,000 on your current mortgage. You refinance into a new $380,000 loan, pay off the $280,000 balance, and pocket the $100,000 difference (minus closing costs). Your new mortgage is $380,000 at the current rate, and you have $100,000 in cash for whatever you need.

Because a cash-out refinance creates a completely new first mortgage, the interest rate reflects current market conditions. If current rates are higher than your existing rate, your monthly payment may increase significantly — not just from the larger loan balance, but also from the higher rate. This is the central trade-off.

Cash-out refinance eligibility is evaluated by the type of property, your equity, and your creditworthiness:

• Equity requirement: You must retain at least 20% equity in the home after the cash-out. In other words, the new loan cannot exceed 80% of the home's appraised value for conventional loans. FHA cash-out refinances allow up to 80% LTV; VA cash-out allows up to 90% LTV for eligible veterans.
• Credit score: 620+ for conventional; 580+ for FHA cash-out; no minimum set by VA (but lenders typically require 620+). Better credit scores unlock lower rates and higher LTV allowances.
• Debt-to-income ratio: Typically 43%–45% or below, based on the new, larger loan amount and any other debts. If you're using cash to pay off debts, some lenders will exclude those paid-off debts from the DTI calculation.
• Waiting period: For conventional loans, you must typically have owned the home for at least 6 months before doing a cash-out refinance. Some lenders require 12 months.
• Investment properties: Must retain 25%–30% equity (70%–75% max LTV) and typically require a 680–700+ credit score. Rates are higher than for primary residences.

Cash-out refinances are equity-based — your home's appraised value and existing mortgage determine what you can access:

• Maximum cash-out formula: (Home value × 80%) − current mortgage balance = maximum cash available. Example: $500,000 × 80% = $400,000 max new loan. With $280,000 owed, you can take up to $120,000 in cash (before closing costs).
• Credit score pricing: On a cash-out refinance, rate pricing is more sensitive to credit score than a standard rate-and-term refi. A 760+ score versus 620 can mean a difference of 0.75%–1.5% in rate on the full new loan balance.
• VA cash-out: Veterans can access up to 90% LTV on a cash-out refinance using their VA benefit, providing more equity access than conventional or FHA options.

Cash-out refinances carry higher costs than second-lien options (HELOC, home equity loan) because you're replacing the entire first mortgage:

• Closing costs: 2–5% of the new loan amount, applied to the full new balance — not just the cash-out portion. On a $380,000 new loan, that's $7,600–$19,000 in closing costs. This significantly changes the break-even calculation.
• Loan-level price adjustment (LLPA): Fannie Mae and Freddie Mac add a pricing surcharge (LLPA) specifically for cash-out refinances. This is charged upfront or baked into a higher rate, and adds cost relative to a rate-and-term refinance.
• PMI: Not required if you maintain 20%+ equity, which is a prerequisite for conventional cash-out refinancing.
• FHA and VA fees: FHA cash-out refinances require the 1.75% upfront MIP plus ongoing annual MIP. VA cash-out refinances require the VA funding fee (2.15% for first use at 0% down, though the equity structure means a down payment equivalent applies).