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What is a cash-out refinance? How it works, what it costs, and when it makes sense
In this article:
- What is a cash-out refinance?
- How does a cash-out refinance work?
- Cash-out refinance requirements
- What can you use a cash-out refinance for?
- When to think twice before using a cash-out refinance
- What is the 12-month rule for a cash-out refinance?
- How much could you get from a cash-out refinance?
- How much does a cash-out refinance cost?
- Cash-out refinance vs. other ways to access home equity
- Is a cash-out refinance right for you?
- Next steps: Find out whether a cash-out refinance fits your goals
- FAQs
Quick answer: A cash-out refinance replaces your existing mortgage with a new, larger mortgage and provides the difference in cash. Homeowners often use the funds for home improvements, getting a handle on higher-interest debt, or covering other major expenses, but replacing your mortgage may also affect your interest rate, monthly payment, and long-term borrowing costs.
Key Points
The amount you may be eligible to receive depends on factors such as your available home equity, current mortgage balance, property value, and loan requirements.
Because a cash-out refinance replaces your existing mortgage, your interest rate, monthly payment, and total borrowing costs may change.
Before refinancing, compare a cash-out refinance with other ways to access home equity, such as a home equity line of credit (HELOC), home equity loan, or reverse mortgage if you’re eligible.
For those looking to access home equity, a home equity line of credit (HELOC) may be the first thing that comes to mind. However, a cash-out refinance is another option that replaces your existing mortgage with a new, larger loan and allows you to access a portion of your available home equity.
With a cash-out refinance, you borrow more than you currently owe on your mortgage. After your existing loan is paid off, you receive the remaining proceeds in cash, minus applicable closing costs or other obligations. Homeowners may use the funds for home improvements, paying off higher-interest debt, education expenses, or other major financial goals.
Whether a cash-out refinance is the right choice depends on your current mortgage, available home equity, interest rates, and long-term financial goals. This guide explains how cash-out refinances work, who may be eligible, the costs involved, and how they compare with other ways to access home equity.
What is a cash-out refinance?
A cash-out refinance is a mortgage refinance that replaces your existing mortgage with a new, larger mortgage and allows you to borrow against the available equity in your home. Unlike a traditional rate-and-term refinance, it provides cash proceeds at closing.
Cash-out refinance rates are often slightly higher than comparable rate-and-term refinances because you’re borrowing additional funds against your home equity.
Here’s a quick comparison of how the two refinancing options differ.
| Cash-out refinance | Traditional refinance |
| Replaces your existing mortgage | Replaces your existing mortgage |
| Provides cash proceeds | Does not provide cash back |
| Increases your mortgage balance | Generally keeps your loan amount similar (unless fees are financed) |
| Often used to access home equity | Often used to lower an interest rate or change the loan term |
How does a cash-out refinance work?
A cash-out refinance follows many of the same steps as applying for a traditional mortgage. Your lender reviews your finances, evaluates your home’s value, and determines whether you meet the loan’s eligibility requirements. If your application is approved, your existing mortgage is paid off and replaced with a new, larger mortgage.
The cash-out refinance process
From application to closing, the process typically takes around 30 to 45 days, although timelines vary depending on the lender, appraisal, underwriting, and other factors.
Here’s what the cash-out refinance process typically looks like:
| Step | What happens |
| Home equity review | Your lender reviews your current mortgage balance and an initial estimate of your home’s value to determine how much you may be able to borrow. |
| Loan application | You submit financial information, such as income, employment, assets, and existing debts. Comparing offers from multiple lenders may help you find more favorable interest rates, fees, and loan terms. |
| Home appraisal | Once you submit your application, the lender typically orders an appraisal to confirm your home’s current market value. |
| Underwriting | The lender evaluates your credit, income, debt-to-income ratio, and other eligibility requirements before making a lending decision. |
| Closing | If approved, you sign the new loan documents, and your existing mortgage is paid off. |
| Funding | After any required waiting period, you receive the remaining cash proceeds. |
Consider the following example:
Betty owns a home worth $500,000 and owes $250,000 on her current mortgage. She wants to renovate her kitchen, replace her roof, and improve her home’s accessibility so she can remain there comfortably as she gets older.
After reviewing her finances and home equity, her lender approves a new mortgage for $325,000. The new loan pays off her existing mortgage, and after applicable closing costs are deducted, Betty receives the remaining proceeds in cash to pay for the renovations.
Although Betty now has access to funds for her home improvements, she also has a larger mortgage than before. Depending on her new interest rate and loan terms, her monthly payment and total borrowing costs may change. That’s why it’s important to consider both the immediate access to cash and the long-term cost of replacing your existing mortgage.
Cash-out refinance requirements
Lenders typically evaluate several factors before approving a new mortgage, including:
- Home equity: Most lenders require homeowners to leave a portion of their equity in the home after refinancing. Many conventional lenders limit borrowing to about 80% of the home’s value, although requirements vary by lender and loan product.
- Credit score: A stronger credit profile may improve your financing options and help you be eligible for more favorable loan terms. Many conventional lenders look for a credit score of at least 620, although minimum requirements vary.
- Income: Lenders review your income to determine whether you’ll likely be able to repay the new mortgage. You may be asked to provide pay stubs, tax returns, bank statements, or other financial documentation.
- Debt-to-income (DTI) ratio: Many lenders prefer a DTI ratio of 43% or less, although acceptable ratios vary by lender and loan type.
- Property appraisal: Most cash-out refinances require an appraisal to determine your home’s current market value and available equity.
- Occupancy: Eligibility requirements may differ depending on whether the property is your primary residence, second home, or investment property.
What can you use a cash-out refinance for?
Cash-out refinances remain a popular way to access home equity. In the second quarter of 2025, they accounted for nearly 60% of all refinance transactions, according to ICE Mortgage Technology.
Homeowners use cash-out refinances for a variety of purposes. Because you receive a lump sum at closing, a cash-out refinance may be appropriate for larger expenses that would otherwise require higher-interest borrowing or years of saving. Common uses include:
- Home improvements: Renovations, roof replacement, energy-efficiency upgrades, and accessibility modifications that support aging in place.
- Paying off higher-interest debt: Using the proceeds to repay credit cards, personal loans, or other higher-interest debt by replacing it with mortgage debt, which may reduce monthly payments or simplify repayment.
- Medical expenses: Covering unexpected healthcare costs or ongoing care needs.
- Education expenses: Paying for college tuition, graduate school, or other education-related costs after comparing the long-term costs with other financing options.
- Major purchases: Purchasing a second home, investing in a rental property, buying a vehicle, or covering another significant planned expense.
- Emergency expenses: Covering unexpected costs, such as major home repairs following storm damage, although refinancing may not be the best option if you need funds quickly.
When to think twice before using a cash-out refinance
Although a cash-out refinance may provide access to home equity, it isn’t always the best solution. Because you’re replacing your existing mortgage with a larger one, it’s important to consider both the immediate advantages and the long-term financial tradeoffs before moving forward.
Paying off unsecured debt
Using a cash-out refinance to pay off credit cards or other unsecured debt may reduce your interest rate. However, it also converts unsecured debt into debt secured by your home, putting the property at risk of foreclosure if you don’t make the required mortgage payments.
Investing borrowed funds
Borrowing against your home to invest carries additional risk. Investments may increase or decrease in value, but you’ll remain responsible for repaying the larger mortgage regardless of investment performance.
Funding discretionary purchases
Using home equity to pay for vacations, luxury purchases, or other nonessential expenses may leave you with a larger mortgage long after those purchases have been made.
Covering a large one-time expense
A cash-out refinance may help cover a significant one-time expense, but replacing your existing mortgage isn’t always the most cost-effective solution. Before moving forward, compare the long-term cost of refinancing with other financing options.
What is the 12-month rule for a cash-out refinance?
Many cash-out refinance programs require homeowners to own their home—or make on-time mortgage payments—for a certain period before becoming eligible for a cash-out refinance.
Although people often refer to this as the 12-month rule, the actual waiting period depends on the loan product and your lender.
Waiting periods help reduce lending risk and ensure homeowners have established ownership and repayment history before borrowing additional funds against their home.
Requirements vary by loan type. Conventional, Federal Housing Administration (FHA), and U.S. Department of Veterans Affairs (VA) loans may each have different eligibility requirements, including how long you must own your home before refinancing.
Because guidelines change over time, it’s important to check with your lender to understand the current requirements that apply to your situation.
How much could you get from a cash-out refinance?
The amount you may be eligible to receive depends on more than your home’s value. Lenders consider several factors when determining how much home equity may be available through a cash-out refinance.
These factors typically include:
| Factor | Why it matters |
| Home equity | More available equity may increase the amount you may be eligible to receive. |
| Current mortgage balance | Your existing mortgage must be paid off first, reducing the amount available in cash. |
| Property value | A higher appraised value may increase your available equity. |
| Loan-to-value (LTV) ratio | Most lenders limit how much of your home’s value you may borrow. |
| Loan type | Conventional, FHA, and VA loans have different borrowing limits and eligibility requirements. For example, some eligible borrowers using VA cash-out refinance loans may be able to borrow up to 100% of their home’s value, subject to lender guidelines. |
Understanding LTV
One of the most important factors lenders consider is your LTV ratio, which compares your mortgage balance with your home’s appraised value.
For example, suppose:
- Your home is worth $500,000
- You owe $250,000 on your current mortgage
Your LTV ratio is 50% because your mortgage balance ($250,000) is 50% of your home’s appraised value ($500,000). That also means you have 50% equity in your home.
Although you have $250,000 in home equity, that doesn’t necessarily mean you’ll be able to borrow the entire amount.
Most lenders require homeowners to keep a portion of their equity in the home after refinancing. The maximum amount you may be eligible to borrow depends on your lender, loan product, and financial situation.
For a more detailed explanation of how LTV works and why it matters, see our guide: Reverse mortgage loan-to-value ratios explained.
Why your existing mortgage matters
A cash-out refinance doesn’t simply provide a lump sum based on your home’s value. Your existing mortgage is paid off first, and the remaining loan proceeds—after applicable closing costs and other obligations—are disbursed to you.
Because several factors affect borrowing power, your lender can provide a more accurate estimate based on your individual financial situation. Even if you are eligible to borrow a larger amount, that doesn’t necessarily mean you have to. Consider borrowing only what you need to help keep your mortgage balance and long-term borrowing costs as low as possible.
How much does a cash-out refinance cost?
Like any mortgage, a cash-out refinance involves closing costs and other fees. Some costs are paid upfront, while others may be rolled into your new mortgage. Understanding these expenses can help you determine whether refinancing makes financial sense.
Although costs vary by lender, loan amount, and location, homeowners typically pay 2% to 6% of the loan amount in closing costs.
Common expenses may include:
| Cost | What it covers |
| Loan origination fee | The lender’s fee for processing and originating your new mortgage. |
| Home appraisal | The cost of determining your home’s current market value. |
| Title services | The title search, title insurance, and related closing services. |
| Credit report | The cost of reviewing your credit history. |
| Recording and government fees | Local government fees for recording the new mortgage. |
| Other closing costs | Prepaid interest, escrow funding, and other lender-required closing costs, depending on the loan. |
Can you roll closing costs into a cash-out refinance?
Sometimes. Depending on your lender and available home equity, you may be able to finance some or all of your closing costs rather than paying them out of pocket at closing.
While this may reduce your upfront expenses, it also increases your new mortgage balance. As a result, you’ll receive less cash from the refinance—or pay interest on a larger loan balance over time.
Before deciding to roll closing costs into your mortgage, compare the short-term convenience with the long-term cost of financing those expenses.
Cash-out refinance vs. other ways to access home equity
A cash-out refinance is one of several ways to access your home’s equity. Depending on your financial goals, existing mortgage, and how you plan to use the funds, another option may be a better fit.
The table below compares some of the key differences.
| Feature | Cash-out refinance | Home equity line of credit (HELOC) | Home equity loan* | Reverse mortgage |
| Replaces your current mortgage | Yes | No | No | Yes (if you have an existing mortgage, it is generally paid off at closing) |
| How you receive funds | Lump sum | Line of credit (draw funds as needed) | Lump sum | Lump sum, line of credit, monthly payments, or a combination of these options (depending on the product) |
| Required monthly mortgage payments | Yes | Yes | Yes | No required monthly mortgage payments on the loan as long as you comply with the loan terms** |
| Interest rate | Fixed or adjustable | Usually adjustable | Usually fixed | Fixed or adjustable (depending on the product) |
| Common use | One-time borrowing needs | Ongoing or uncertain expenses | One-time borrowing needs | One-time or ongoing borrowing needs |
*Finance of America does not currently offer home equity loans.
**The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
To learn more, please visit the CFPB’s “Reverse Mortgage: A Discussion Guide”
Cash-out refinance vs. HELOC
Both a cash-out refinance and a HELOC allow homeowners to borrow against their home equity, but they work differently.
A cash-out refinance replaces your existing mortgage with a new one and provides your funds in a lump sum. A HELOC leaves your existing mortgage in place and provides a revolving line of credit that you may draw from as needed during the draw period.
A HELOC may make sense if you expect ongoing expenses, such as a multi-phase home renovation, or if you don’t know exactly how much you’ll need to borrow. A cash-out refinance may be a better fit if you need a larger lump sum and refinancing your existing mortgage aligns with your financial goals.
→ Read more: Is a HELOC a good idea? Here’s how to decide
Cash-out refinance vs. home equity loan
Like a cash-out refinance, a home equity loan provides a lump sum. However, instead of replacing your existing mortgage, it creates a second loan secured by your home.
One advantage of a home equity loan is that you may be able to keep your existing mortgage—and its interest rate—while borrowing against your available equity.
On the other hand, you’ll generally have two monthly loan payments: your original mortgage payment and the home equity loan payment.
Finance of America does not currently offer home equity loans.
Cash-out refinance vs. reverse mortgage
For eligible homeowners age 55 and older (depending on the loan type and state), a reverse mortgage may be another option to consider. While both types of loans allow homeowners to access home equity, they work differently and may be appropriate in different situations.
A cash-out refinance replaces your existing mortgage with a new traditional mortgage, which typically requires eligibility factors such as income, credit, and DTI. A reverse mortgage generally pays off any existing mortgage at closing and replaces it with a reverse mortgage. Unlike a traditional mortgage, a reverse mortgage generally doesn’t require monthly mortgage payments, provided the borrower continues meeting the loan obligations, including living in the home as their principal residence, paying property charges such as property taxes, homeowners insurance, and applicable fees, and maintaining the home.
Here’s a side-by-side comparison of some of the key differences.
| Feature | Cash-out refinance | Reverse mortgage |
| Existing mortgage | Replaced with a new mortgage | Usually paid off at closing, if applicable |
| Monthly mortgage payments | Required | No required monthly mortgage payments on the reverse mortgage, provided the borrower continues to meet loan obligations* |
| Eligibility | Typically based on income, credit, DTI ratio, and other underwriting requirements | Primarily based on age, home equity, and property eligibility, but can vary by loan type |
| Who may consider it | Homeowners looking to refinance and borrow against their equity | Older, eligible homeowners seeking to access home equity in retirement |
| Age requirement | None beyond lender requirements | Generally 62+, but varies by product and state |
*The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
→ Learn more: What is a reverse mortgage and how does it work?
Is a cash-out refinance right for you?
Whether a cash-out refinance is right for you depends on your financial goals, your current mortgage, and how you plan to use your home equity. Before making a decision, compare a cash-out refinance with other ways to access home equity and consider how replacing your existing mortgage fits into your long-term financial plans.
A cash-out refinance may make sense if:
- Current interest rates and loan terms support your financial goals.
- You have stable income and can comfortably afford the new mortgage payment.
- You expect to remain in your home for many years.
- You’re planning significant home improvements.
- You’re using the proceeds to pay off higher-interest debt after carefully considering the long-term costs.
Another option may be a better fit if:
- You already have a very low mortgage interest rate you’d rather keep.
- A higher monthly mortgage payment would strain your budget.
- You expect to move within the next few years.
- You need only a relatively small amount of cash.
- You’re retired or living on a fixed income and want to compare options that don’t require monthly mortgage payments.
Questions to ask yourself
Before moving forward, consider the following questions:
- Am I giving up a mortgage with a significantly lower interest rate?
- Will refinancing increase my monthly mortgage payment?
- Will the amount I receive justify the closing costs and do I plan to remain in my home long enough to recover those costs?
- Have I compared a cash-out refinance with other home equity options, including a HELOC, home equity loan, and, if I’m eligible, a reverse mortgage?
- Have I compared offers from multiple lenders, including interest rates, fees, and closing costs?
Answering these questions may help you determine whether a cash-out refinance aligns with your long-term financial goals.
Next steps: Find out whether a cash-out refinance fits your goals
A cash-out refinance isn’t the only way to access home equity. Before making a decision, compare the costs, monthly payments, and long-term impact with other home equity options.
If you’re age 62 or older, comparing a cash-out refinance with a reverse mortgage may help you determine which option best supports your retirement goals and financial needs.
Ready to explore your options? See how much home equity you may be eligible to access with Finance of America’s reverse mortgage calculator.
FAQs
Is a cash-out refinance a good idea?
It depends on your financial goals. A cash-out refinance may make sense if you need a lump sum to fund home improvements, pay off higher-interest debt, or cover a major expense and you’re comfortable replacing your existing mortgage. Before refinancing, compare the long-term costs with other ways to access your home equity.
What is the downside of a cash-out refinance?
Because a cash-out refinance replaces your existing mortgage, you may receive a higher interest rate, larger monthly payment, or both. You’ll also pay closing costs and increase your mortgage balance. For homeowners with a very low existing mortgage rate, replacing that loan may not be the most cost-effective choice.
Can I get a cash-out refinance with bad credit?
It may be possible, but requirements vary by lender and loan type. Loan approval depends on the lender’s underwriting guidelines, including your credit history, income, home equity, and overall financial profile. A lower credit score may limit your financing options or result in a higher interest rate.
Does a cash-out refinance hurt your credit?
A cash-out refinance may temporarily lower your credit score because lenders typically perform a hard credit inquiry and you’ll open a new mortgage account. However, the impact is often temporary if you continue making your mortgage payments on time.
How many times can I use a cash-out refinance?
There is no set limit on how many times you can use a cash-out refinance, provided you continue meeting your lender’s eligibility requirements. However, each refinance involves closing costs and replaces your existing mortgage, so consider whether the financial advantages outweigh the additional costs before refinancing again.
Do you have to pay taxes on a cash-out refinance?
Cash-out refinance proceeds generally aren’t considered taxable income because they’re loan proceeds rather than earned income. Whether your mortgage interest is tax deductible depends on how you use the funds. Consult a qualified tax professional regarding your specific situation.
Is a cash-out refinance better than a reverse mortgage?
Neither option is universally better—they’re designed for different situations. A cash-out refinance requires monthly mortgage payments, while a reverse mortgage generally doesn’t require monthly mortgage payments on the loan as long as the borrower continues to meet the loan obligations.
About the author
is a Senior Web Content Writer at Finance of America and a journalist with more than 20 years of experience specializing in business, and technology. Her work has been published in The Wall Street Journal, The Financial Times, and numerous other leading outlets.
Disclaimer
This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For tax advice, please consult a tax professional. For more information about whether a reverse mortgage fits into your retirement strategy, you should consult your financial advisor.
