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As a homeowner, your house is likely your largest financial asset. And if you've built up significant equity over the years, a cash-out refinance could be a way to tap into that value for major expenses, like home improvements, debt consolidation, or other financial goals.
Unlike a traditional mortgage refinance that simply adjusts your rate or terms, a cash-out refinance lets you borrow against your home's equity and walk away with cash at closing. It's a powerful financial tool, but like any borrowing decision, it requires careful consideration of your circumstances and goals.
How a Cash-Out Refinance Works
A cash-out refinance replaces your existing mortgage with a larger one and lets you pocket the difference in cash.
For example, if your home is worth $300,000 and you owe $150,000, you might refinance into a $200,000 loan. You’d use $150,000 to pay off the old mortgage and walk away with $50,000 in cash (minus closing costs).
In short, you’re turning home equity into liquid funds while starting a new mortgage, often with different terms, rates, or payments. The new loan becomes your primary mortgage, repaid in monthly installments over 15–30 years. The key difference is that you’re now paying interest on both your original balance and the cash you received.
Cash-Out Refinance vs Home Equity Loan vs HELOC
Though similar, a cash-out refinance and home equity loan aren’t quite the same thing. With a cash-out refinance, you’re replacing your old mortgage with an entirely new one. With a home equity loan, your original mortgage stays as is, but you’re taking out a new loan using your home’s equity as collateral. In this case, you have two loans to pay off — the original mortgage and the new home equity loan — versus just a single new mortgage loan.
A HELOC (home equity line of credit), on the other hand, gives you a revolving line of credit backed by your home. Instead of a lump sum, you draw funds as needed during a set period, usually at a variable rate. It’s more flexible, but less predictable.
Here’s a clear breakdown:
| Cash-Out Refinance | HELOC | Home Equity Loan | |
|---|---|---|---|
| Structure | Replaces existing mortgage | Second mortgage, line of credit | Second mortgage, fixed loan |
| Access to Funds | Lump sum at closing | Draw as needed during draw period | Lump sum at closing |
| Interest Rate | Fixed (typically) | Variable, often starts lower | Fixed |
| Repayment | Monthly payments over loan term | Usually interest-only then principal + interest | Monthly payments over loan term |
Key Requirements & Qualifications
Cash-out refinances come with stricter rules than standard rate-and-term refinances, since lenders see them as higher risk. Here are the key factors lenders review:
Credit Score Requirements
Conventional lenders generally require at least a 620 credit score, though the best rates usually go to borrowers with 700+. While this will apply to most cash-out refinances, there are a few special cases — e.g., FHA and VA cash-out refinances may approve individuals with significantly lower scores, though they generally still expect to see a score in the 580–620 range.
Debt-to-Income Ratio (DTI)
Lenders look at how much of your gross monthly income goes toward debt, including your new mortgage payment. The general rule of thumb is for this number to stay under 43%, no matter the loan type. Competitive rates usually go to borrowers with ratios closer to 36% or less, though some lenders may approve up to 45–50% with strong credit or other factors.
Loan-to-Value (LTV) / Equity
Lenders also look at how much equity you’ll have left in the home after refinancing. With conventional and FHA cash-out refinances, you can usually borrow up to 80% of your home’s value, leaving 20% equity in the home. VA loans are more flexible, often allowing you to tap up to 90% of the home’s value — and in some cases, even the full 100% — depending on the lender.
LTV requirements might also depend on property type and location. For example, single-family homes typically qualify for the highest LTV ratios, while condos, multi-unit properties, and investment homes may face stricter limits. As for location, some states impose their own rules. For example, Texas caps all cash-out refinances at 80% LTV, no matter the loan program.
Employment and Income
Lenders want to see that you have a steady source of income to support the new loan. That usually means at least two years of continuous employment, verified with pay stubs, W-2s, or tax returns. If you’re self-employed , you’ll need to show business tax returns and other proof of stable earnings.
Appraisal and Documentation
You’ll need a new home appraisal to confirm your home’s current value, since that number directly determines how much equity you can take out in cash. Be prepared to provide supporting documents as well, such as income statements, tax returns, bank statements, and details about your existing mortgage and other debts. Lenders often review these carefully to make sure you can handle the higher loan amount.
How Much Can You Cash Out?
The exact amount of money you can borrow in a cash-out refinance depends on your home's current value and your lender's LTV requirements.
Here's the formula:
Home Value × Maximum LTV Percentage - Current Mortgage Balance = Maximum Cash Out
For example, let’s say your home appraises for $400,000, you currently owe $200,000 on your mortgage, and your lender allows 80% LTV. The calculation for how much you can take out will look something like:
$400,000 × 0.80 = $320,000 (maximum new loan amount)
$320,000 - $200,000 = $120,000 (maximum cash out, before closing costs)
Several factors determine how much cash you can take out of your home:
Property type: Single-family homes typically qualify for higher LTV ratios than condos or investment properties.
Credit score and finances: Stronger borrowers may access higher percentages.
Loan program: Conventional, FHA, or VA loans have different limits.
Property location: Some areas have additional restrictions.
Pros & Cons of a Cash-Out Refinance
A cash-out refinance comes with benefits and trade-offs. The decision of whether or not to opt for one ultimately comes down to whether the benefits of accessing your equity outweigh the costs and risks of increasing your mortgage balance. Here’s what to consider:
The upside: You can unlock a significant amount of equity all at once, making it a good option for major expenses like renovations, tuition, or medical bills. The cash you take out is financed at mortgage rates, which are usually far lower than rates on credit cards, personal loans, or even HELOCs. If you're carrying high-interest debt, you can use the lump sum to pay it off entirely and simplify things down to just your mortgage payment. There's also a potential tax advantage—mortgage interest may be deductible when the money is used on home improvements. And if today's mortgage rates are lower than your current rate, you could potentially lock in a better rate on your entire balance.
The downside: Extending your loan term resets the payoff clock, so even at a lower rate you may end up paying more interest over time. You'll also face closing fees of roughly 2–6%, which can add up and reduce the net benefit of the cash you receive. Tapping equity lowers your stake in the home, leaving you more exposed if property values fall. Perhaps most importantly, this debt is tied to your home, which means that falling behind on the new, larger mortgage puts your house at greater risk of foreclosure. Cash-out loans are also often priced above simple rate-and-term refinances, since lenders view them as carrying more risk.
Common Uses of Cash-Out Funds
Smart uses of the funds you get from a cash-out refinance can improve your financial position or add value:
Home renovations that increase property value — kitchen remodels, bathroom upgrades, or adding square footage
Debt consolidation to pay off high-interest credit cards or personal loans
Education expenses for college tuition or professional development
Investment opportunities like purchasing rental property or funding a business
Avoid using cash-out funds for risky expenses like luxury purchases, speculative investments, or everyday spending. Remember that you're putting your house on the line for whatever you purchase with these funds, so make sure it's worth the risk.
When Does a Cash-Out Refinance Make Sense?
Beyond how you plan to use the funds, it's just as important to consider whether the timing is right. The best cash-out refinance scenarios combine the need for funds with the opportunity to improve your overall mortgage terms, creating a win-win situation for your finances.
The strongest case for a cash-out refinance is when you have substantial equity—ideally at least 30-40%—so you maintain a comfortable cushion after borrowing. The opportunity becomes even more compelling if your current mortgage rate is higher than today's rates, allowing you to improve your terms while accessing cash. You should also plan to stay in the home for several years to recoup the closing costs, and have a specific, valuable use for the funds that justifies taking on increased debt.
On the flip side, there are a few scenarios where it makes sense to think twice. If you're planning to move within the next few years, you may not have time to benefit from the refinance. If current mortgage rates are higher than your existing rate, you'd be trading up to a more expensive loan just to access cash. Similarly, if you're already struggling with your current mortgage payment, adding to that debt could push you further into financial strain. And finally, using the money for discretionary spending or high-risk investments rarely justifies putting your home on the line.
Ready to Take the Next Step?
A cash-out refinance can be a smart way to put your home equity to work — but it’s not a one-size-fits-all solution. The key is weighing the benefits against the costs and making sure the timing and purpose align with your long-term goals.
If you’re ready to explore whether refinancing is right for you, Sunward offers guidance, tools, and options to help you make the most of your next financial move.
All examples in this article are for illustrative purposes only. Actual results will vary depending on individual loan terms, interest rates, payment amounts, and other factors.
FAQs
How long does a cash-out refinance take?
Usually 30–45 days, depending on how quickly the appraisal and paperwork are completed.
Do you pay taxes on a cash-out refinance?
No. The cash isn’t taxed because it’s loan proceeds, not income. Mortgage interest may be deductible if the funds go toward home improvements. Please consult a tax professional regarding any tax implications of interest deductions.
How much can I borrow?
The exact amount depends on your home’s value, your mortgage balance, and lender rules. Most conventional and FHA cash-out refinances cap at 80% LTV, while VA loans may allow up to 90–100%.
What’s the difference between a HELOC and a cash-out refinance?
A cash-out refinance replaces your existing mortgage with a larger one and gives you a lump sum at closing. A HELOC is a separate line of credit that lets you borrow against your home as needed, usually at a variable rate.
