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Loading...Loading...A cash-out refinance gives you a new, bigger loan instead of your current mortgage and gives you the difference in cash. This allows you take out and use the equity you've built up in your home over time.
Every time you make a mortgage payment, a piece of that money chips away at your loan balance. Your equity grows a little with each check. And if your home has gone up in value since you bought it, your equity has grown even more. A cash-out refinance is one way to put that equity to work for you.
Here's the basic idea. You take out a brand-new mortgage bigger than what you currently owe, use the new loan to pay off the old one, and pocket the difference as cash. So if you owe $180,000 on a house worth $320,000, you've got $140,000 in equity. With a cash-out refinance, you could take a new loan for, say, $230,000. Your old $180,000 balance gets paid off, and you walk away with roughly $50,000 in your pocket after closing costs.
It's different from a rate-and-term refinance, where the goal is just to get a better interest rate or change the length of your loan. With a cash-out refi, you're doing something extra. You're pulling money out of your home's value.
One thing that trips people up is the difference between a cash-out refinance and a second mortgage. They're not the same. A home equity loan or a home equity line of credit (HELOC) sits on top of your first mortgage, so you end up with two separate monthly payments. A cash-out refinance wipes out the old loan and replaces it with one new loan. One payment. That's it.
According to the Consumer Financial Protection Bureau, paying off other bills and debts is the most common reason people do a cash-out refinance, with more than half of borrowers in a recent multi-year survey choosing that option. Home repairs and new construction came in second. This lines up with what I see in conversations around the office, too. People have equity sitting there, and they need a way to get at it without selling the house.
The cash you get from a cash-out refinance isn't taxed as income. The IRS treats it as loan proceeds, not earnings. But there are some tax rules around how you can deduct the interest, and those rules depend on what you use the money for. More on that later.
So who actually does this? All kinds of homeowners. Some have lived in their homes for decades and watched their equity climb. Others bought just a few years ago in a market where values have been rising and now have a chunk of equity they didn't expect. The common thread is that they need a meaningful amount of cash and they'd rather borrow against their home at mortgage rates than rack up credit card debt or drain their savings accounts. It's worth noting that cash-out refinances became a bigger share of the overall refinance market during periods when interest rates were climbing, according to the CFPB. When rates go up, fewer people refinance just for a better rate, but those who need cash still come to the table.
The process looks a lot like buying a house all over again, just without the house hunting part. You apply with a lender, provide a stack of paperwork, go through underwriting, get an appraisal, and close. Then you wait a few days for your check.
Step one is figuring out where you stand. How much equity do you have? What's your credit score? What does your monthly budget look like with a potentially larger payment? This is where most people either green-light the idea or pump the brakes. If you can answer those questions and the numbers still make sense, you're ready to move forward.
Next, you pick a lender and submit your application. You'll need the usual documents: pay stubs, W-2s, bank statements, tax returns. Your lender will also order an appraisal to find out what your home is worth right now. That appraisal number matters a lot because it determines how much equity you actually have, which in turn determines how much cash you can pull out. AmeriSave can get you started online and will assign a loan officer to walk you through each step.
Underwriting is where the lender digs into everything. They'll check your income, your debts, your credit history, and the appraisal report. This process can take a couple of weeks, sometimes longer if you have a complicated financial picture. If it all checks out, you get a clear to close.
At closing, you sign a new set of loan documents. Your old mortgage gets paid off from the proceeds of the new one. But you don't get your cash right away.
Why not? Federal law gives you a three-day right of rescission. That means you have three business days after closing to cancel the deal if you change your mind. This protection comes from the Truth in Lending Act, and it applies to most refinance transactions on a primary residence. Once those three days pass without you canceling, the lender releases your funds. Expect the whole timeline to take somewhere between 30 and 60 days from application to cash in hand.
Requirements vary from lender to lender, but there are some common benchmarks you'll run into no matter where you apply.
You need equity to do this. That's the whole point. For most conventional loans, lenders want you to keep at least 20% equity in the home after the refinance. So if your house is worth $400,000, you could borrow up to $320,000 total, minus what you already owe. If you still owe $250,000, that means you could potentially pull out up to $70,000.
VA loans are the big exception here. Eligible veterans and active-duty service members can sometimes borrow up to 100% of their home's value through a VA cash-out refinance, which means they can tap into all of their equity.
For a conventional cash-out refinance, you'll generally need a credit score of at least 620. FHA cash-out refinances may go as low as 580, depending on the lender and how you plan to use the funds. VA cash-out loans also start around 580 for some lenders, with 620 or higher needed to borrow the full amount of your equity.
According to CFPB research, the median credit score for cash-out refinance borrowers has been around 741, which suggests that while lower scores can qualify, many successful applicants have scores well into the good-to-excellent range. A stronger credit score can help you land a better rate, and even a fraction of a percentage point can save you real money over the life of a 30-year loan.
Your debt-to-income ratio, or DTI, measures how much of your monthly gross income goes toward debt payments. Most lenders want this number to be 50% or lower for a cash-out refinance. Some loan types are a little more flexible. To find your DTI, add up all your monthly debt payments, including your projected new mortgage payment, and divide by your gross monthly income. If you make $6,000 a month and your debts total $2,400, your DTI is 40%.
According to the Fannie Mae Selling Guide, your existing first mortgage must be at least 12 months old before you can do a cash-out refinance. You also need to have been on the title for at least six months. These rules exist to prevent people from buying a home and immediately cashing out the equity, which adds risk to the mortgage market.
The amount depends on your home's appraised value, your current loan balance, and the maximum loan-to-value ratio your lender allows. For conventional loans, that LTV cap is usually 80%. Here's what that looks like with real numbers.
Say your home appraises at $350,000. With an 80% LTV limit, the most you could borrow is $280,000. If you still owe $195,000 on your current mortgage, you'd subtract that from the $280,000 max. That leaves $85,000 in potential cash. But hold on, you still have to pay closing costs. If those run about $8,400 (which is roughly 3% of the new $280,000 loan), your actual cash after closing costs drops to around $76,600.
Now look at what happens to your monthly payment. On the old $195,000 loan at 7.25% over 30 years, your principal and interest payment would have been about $1,330. The new $280,000 loan at, say, 6.5% would run about $1,770 a month. You're looking at an extra $440 a month, which works out to around $5,280 more per year. You got $76,600 in cash, but your housing costs went up. So you have to ask yourself: is what I'm doing with that cash worth $440 a month?
That's the question. And the honest answer depends on your situation.
FHA cash-out refinances follow similar LTV rules, capping at 80% of your home's value. VA cash-out refinances can go up to 100% LTV for eligible borrowers, which means a veteran with $140,000 in equity could potentially borrow all of it. But just because you can borrow the maximum doesn't always mean you should. A bigger loan means bigger payments, and if your income takes a hit down the road, those payments don't shrink.
There's no rule that says you have to spend your cash-out funds on one particular thing. But some uses make more financial sense than others.
This is one of the smartest moves you can make with cash-out funds, and it's also one of the most popular. Upgrading a kitchen, replacing a roof, or finishing a basement can boost your home's value, which rebuilds some of the equity you just borrowed against. Plus, if you use the money for improvements that substantially increase your home's value, the interest on that portion of the loan may be tax-deductible under current IRS guidelines.
I had a colleague tell me about a homeowner in Louisville who pulled $45,000 from a cash-out refi to gut and redo a dated kitchen. The project ended up adding close to $60,000 in value to the home at the next appraisal. That's not guaranteed for everyone, of course, but it shows how the right improvement can pay for itself.
The CFPB's research on cash-out refinance borrowers found that credit card and auto loan balances dropped sharply right after the refinance, and credit scores initially jumped. That makes sense. If you're carrying $25,000 in credit card debt at 22% interest, rolling it into a mortgage at 6.5% can save you thousands in interest. But the CFPB also noted that credit scores tended to gradually drift back down over time, suggesting some borrowers ran their balances back up after paying them off. Consolidating debt only works if you change the spending habits that created it.
Some homeowners use cash-out funds to pay for college tuition or other educational costs. Mortgage rates tend to be lower than private student loan rates, so the math can work in your favor. Fannie Mae even has a special student loan cash-out refinance option that waives certain pricing adjustments when the funds go specifically toward paying off student loans. If you or your kids are carrying student debt, that's worth asking about.
Others tap their equity to build up a cash cushion or put funds into retirement accounts. When you weigh a mortgage rate against what long-term investments have historically returned, it can make sense on paper. But you're trading guaranteed home equity for the uncertainty of the market, and your house is the collateral. It's a trade-off worth thinking about carefully. AmeriSave can help you look at the full picture so you're not just crunching numbers in a vacuum.
One thing I've learned from being in this industry is that the best use of cash-out funds is the one that makes your financial life more stable, not more complicated. Paying off a $30,000 credit card balance that's costing you $550 a month in minimum payments can free up real breathing room. This can change your whole monthly budget overnight. Pulling $50,000 to invest in a brokerage account when you're already stretching to make your current payment? That's a different conversation. Know what you're trying to solve before you borrow.
A cash-out refinance isn't free money. You're borrowing against your home, and there are real costs involved.
Expect to pay closing costs ranging from 2% to 6% of the new loan amount. On a $250,000 refinance, that could be anywhere from $5,000 to $15,000. These fees cover things like the appraisal, title search, title insurance, origination fees, and attorney costs if your state requires them. According to the Federal Reserve's consumer guide on refinancing, these expenses come on top of any prepayment penalties you might owe on your existing mortgage, though prepayment penalties have become much less common in recent years.
Some lenders offer a no-closing-cost option where they roll the fees into your loan balance or charge a slightly higher rate. That can work if you're short on upfront cash, but you'll end up paying more over time.
Here's something people forget. When you close on a refinance, your current lender will refund any money sitting in your existing escrow account, usually within a few weeks. So while you might need to prepay taxes and insurance into a new escrow account at closing, you'll get a check from your old servicer that partially offsets those costs. It doesn't cancel out closing costs entirely, but it softens the blow.
Because you're borrowing more than you currently owe, your monthly payment will likely go up. Even if you snag a lower interest rate than what you have now, the larger loan amount can still push your payment higher. Run the numbers before you commit. Can your budget handle the new payment comfortably, even if something unexpected happens? If you have to strain to make it work every month, you might want to borrow less. A good loan officer can help you find the sweet spot between how much cash you need and what your budget can handle.
If you're ten years into a 30-year mortgage and you refinance into a new 30-year loan, you're starting over. That means 30 more years of payments from today. Some people don't mind because they need the lower monthly payment that a longer term will give them. Others choose to refinance into a shorter term, like a 20-year or 15-year loan, to avoid extending their payoff timeline. AmeriSave offers multiple term options so you can match the loan to your goals, and the team can show you how different terms will affect your payment.
Your lender will order an appraisal, and the number that comes back determines everything. If your home appraises lower than you expected, you won't be able to borrow as much. Before the appraiser shows up, it's worth cleaning up the exterior, making small cosmetic fixes, and pulling together a list of improvements you've made since you bought the place. These things can influence the final number.
This one is straightforward but easy to overlook. When you pull cash out of your home, you own less of it. If property values dip and you need to sell, you could end up with less at closing, or in an extreme scenario, you might owe more than the home is worth. This is why it's smart to borrow conservatively and leave yourself a cushion.
There are three different ways to get cash from your home's equity, and each one has its own rules. With a cash-out refinance, you get a new, bigger loan that pays off your current mortgage. You only have to make one payment a month. If you take out a home equity loan, you'll get a lump sum on top of your current mortgage, which means you'll have two payments. A HELOC is like a credit card that is backed by your house. It has a revolving credit line that you can use whenever you need it, and it sits on top of your first mortgage.
So, which one is best for you? A cash-out refinance can help you get a lot of money and lower the interest rate on your first mortgage at the same time. You get your money and lower your rate in one transaction. But if your current interest rate is low and you don't want to lose it, a home equity loan or HELOC lets you keep your first mortgage and only borrow what you need.
The CFPB has said that HELOCs usually have lower monthly payments and a lower risk of foreclosure than cash-out refinances. That's partly because HELOC balances are usually lower and partly because the borrower's original low-rate mortgage stays in place. AmeriSave can help you understand all three options and show you what each one would look like for you.
Also, interest rates are a big factor in this choice. Cash-out refinance rates are usually close to regular mortgage rates, which are usually lower than the rates for home equity loans or HELOCs. But if your current first mortgage rate is much lower than the rates on the market today, the total cost of keeping that lower rate and getting a second loan with a higher rate might still be lower than the cost of refinancing everything at the higher rate. Do the math both ways.
There's also the timing issue. A HELOC is better for you if you're doing a renovation in stages and don't need all the money upfront because it gives you a line of credit that you can use over time. A cash-out refinance or a home equity loan gives you a lump sum of money, which is better for one-time costs like paying off a lot of credit card debt or getting a new roof. Before you make a decision, think about what you really need the money for and how quickly you need it. You can choose from all three products at AmeriSave, so you're not stuck with just one.
Whether you're fixing up your house, paying off high-interest debt, or building a financial safety net, a cash-out refinance can be a smart way to use the equity in your home. But you shouldn't take this decision lightly. You're borrowing against the most valuable thing most people own, so you should think carefully about the costs, the higher payments, and the lower equity. Take the time to do the math, look at your options, and make sure the numbers tell a story that you can live with. AmeriSave can help you compare a cash-out refinance to a home equity loan or a HELOC so you can choose the option that works best for your life. The best financial decision is sometimes the one that helps you sleep at night.
Most cash-out refinances finish in 30 to 60 days. The timeline will depend on how quickly you can get your papers together, how long the appraisal takes, and how busy your lender's underwriting team is at the time. Because of the federally mandated right of rescission period, you'll have to wait three more business days after closing before the money is released. This is probably not the fastest way to get money if you need it right away. You can speed up the first part of the process at amerisave.com by using AmeriSave's online application.
Yes, but the rules are more strict. Most lenders will only lend up to 75% of the value of a single-family investment property, and they may ask for higher credit scores, bigger reserves, and higher interest rates than they would for a primary home. You can do cash-out refinances on investment properties with the Fannie Mae Selling Guide, but the equity and paperwork requirements are stricter. AmeriSave can help you understand the rules for tapping equity on a rental property.
No. The IRS sees cash-out refinance proceeds as loan money, not income, so you don't have to pay income tax on the cash itself. But there are rules about how to deduct the interest. If you take out a loan to buy, build, or make major improvements to the home that secures the loan, you can only deduct the mortgage interest on cash-out funds. You can't deduct that part of the interest if you use the money for something else, like paying off credit cards. Speak with a tax expert about your unique situation. You can learn more.
It depends on what kind of loan it is. Most lenders require a minimum score of 620 for conventional cash-out refinances. FHA and VA cash-out options can sometimes go as low as 580, but the exact number depends on the lender. A higher score can help you qualify and get a lower interest rate. Over time, even a small drop in the interest rate on a large loan can save you thousands of dollars.
You must have at least 20% equity in your home after the new loan closes if you want to do a regular cash-out refinance. You can borrow up to $240,000 if your home is worth $300,000. The amount you owe now will be taken off that limit. Depending on the lender, VA-eligible borrowers may be able to borrow up to 100% of the value of their home. FHA cash-out refinances also have a limit of 80% LTV.
When you apply for a new loan, it shows up as a hard inquiry on your credit report. This can lower your score by a few points for a short time. If you use the cash to pay off credit card debt, your credit utilization ratio could go down, which could actually raise your score in the short term. The CFPB found that cash-out borrowers' credit scores went up right after closing, but they tended to go back down to where they were before the refinance over time.
Not usually right away. According to the Fannie Mae Selling Guide, your current mortgage must be at least 12 months old, starting from the date of the note. You also need to have been on the title for at least six months. There are some exceptions for properties that are passed down or settled in court, like in a divorce. If you don't have a lot of equity in your home yet and need cash, a home equity loan or a personal loan might be a better short-term choice.
It all depends on the interest rate on your mortgage right now. The cash-out refi can be a two-for-one win if your current rate is high and you can refinance at a lower rate and get cash out at the same time. But if the interest rate on your first mortgage is low, it might cost you more to give it up to refinance at a higher rate than it would to get a separate home equity loan. The CFPB has said that home equity loans and HELOCs usually have lower monthly payments and a lower risk of foreclosure than cash-out refinances.
You get less money. Because lenders use the appraised value to figure out the maximum loan amount, a lower appraisal means you have less equity to borrow against. If the numbers don't work anymore, you can still go through with the refinance at the lower amount, or you can walk away. Some borrowers choose to fight the appraisal by giving sales data for similar properties, but that doesn't mean the value will change.
Yes. You can use your equity without getting a new first mortgage with a home equity loan or a HELOC. If your credit or equity doesn't meet the usual standards, FHA and VA loans may have more flexible requirements. If you don't have a lot of equity, a personal loan might be a good option for smaller amounts, but the interest rate will be higher. You could also look into government-backed programs that help people fix up their homes or make them more energy-efficient.
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