Programme
Cash-Out Refinance
A larger loan replacing your current one, with the difference paid to you at closing.
A cash-out refinance pays off your existing mortgage with a new, bigger one and hands you the difference. It is the cheapest way most households can borrow a large sum, because the debt is secured by the house — and that is also precisely what makes it the most consequential. Three things decide whether it is a good idea: how much equity the rules let you take, what the new term does to your total interest, and what you are going to do with the money.
- 80% LTV cap on conventional and FHA
- 90% on a VA cash-out
- Three-day right to cancel
- Priced above a rate-and-term refinance
Floor four
What it gives you
It is the cheapest large borrowing most households can access
A first mortgage secured by your home is priced far below unsecured credit. For a genuinely large, genuinely necessary sum, nothing else in consumer finance comes close.
One payment, one rate, one loan
The existing mortgage is paid off and replaced. There is no second lien to track, no separate rate, and no balloon date to plan around — the alternative structures all leave you managing two loans.
It can restructure the loan at the same time
You are writing a new note anyway, so you can shorten the term, move off an adjustable rate, or remove someone from the loan in the same transaction. Doing those separately would each cost a set of closing costs.
Money spent on the house may still be deductible
Interest on the cash portion is deductible only to the extent the funds buy, build or substantially improve the home securing the loan. That is a narrow rule, but it means a cash-out used for a renovation sits in a different position from one used for anything else.
Floor three
What this programme costs you
Every programme buys you something by charging you something else. This is the half a brochure leaves out, and it is the half that decides whether the programme is right for you.
- Trade-off 01
You are converting unsecured debt into debt secured by your house
Paying off credit cards with a cash-out lowers the monthly payment and lowers the rate, and both of those are real. What also happens is that debt which could at worst have been pursued through the courts becomes debt that can take your home. If the spending pattern that created the card balances continues, you now have the cards again and a larger mortgage. This is the single most common way a cash-out refinance goes wrong, and the arithmetic on the payment never shows it.
- Trade-off 02
The clock restarts, and a lower rate does not always mean less interest
Eight years into a thirty-year loan, a new thirty-year loan means thirty-eight years of interest on the housing debt. The payment may fall and the total may still rise, because you have re-extended the front-loaded part of the schedule where almost everything is interest. If the goal is a lower payment, say so; if the goal is less total cost, keep the remaining term rather than resetting it.
- Trade-off 03
The costs come out of the cash, and on a small cash-out they eat it
Closing costs on a refinance are typically a few percent of the loan amount, and they are charged on the whole new loan, not on the cash you are taking. Taking $25,000 out of a $300,000 refinance means paying costs computed on $300,000. Below a certain size the cash-out is simply the most expensive way to borrow that amount.
- Trade-off 04
A cash-out is priced above a rate-and-term refinance
Fannie Mae and Freddie Mac apply loan-level price adjustments to cash-out transactions, so the rate you are quoted on a cash-out is not the rate you would be quoted on the same loan without the cash. If a rate-and-term refinance and a separate second lien would be cheaper in total, that comparison is worth running before you commit.
Floor two
The published rules, and where they come from
These are rules, not prices. This site publishes no rates, so what follows is the part of the programme that is written down somewhere a third party can check.
| Rule | What it says | Source |
|---|---|---|
| Conventional loan-to-value cap | A cash-out refinance on a one-unit principal residence is limited to 80% loan-to-value. Lower caps apply to second homes, investment properties and multi-unit properties. | Fannie Mae Selling Guide B2-1.3-03; Freddie Mac Seller/Servicer Guide 4301.5 |
| FHA loan-to-value cap | FHA cash-out refinances are limited to 80% loan-to-value. | HUD Mortgagee Letter 2019-11 |
| VA loan-to-value cap and seasoning | A VA cash-out refinance is limited to 90% loan-to-value including the funding fee, and is subject to statutory seasoning and net-tangible-benefit requirements. | 38 U.S.C. 3709; 38 CFR 36.4306 |
| Ownership seasoning | On a conventional cash-out, the borrower must generally have owned the property for at least six months before the disbursement date, with limited exceptions such as delayed financing and inheritance. | Fannie Mae Selling Guide B2-1.3-03 |
| Right of rescission | On a refinance secured by your principal residence with a creditor other than your current one, you have three business days after closing to rescind. Funds are not disbursed until that period expires. | 15 U.S.C. 1635; 12 CFR 1026.23 |
| Interest deductibility | Interest on the cash taken out is deductible only to the extent the proceeds are used to buy, build or substantially improve the home that secures the loan. Cash used for other purposes is not deductible as home mortgage interest. | 26 U.S.C. 163(h)(3), as amended by the Tax Cuts and Jobs Act of 2017 |
| Pricing | Fannie Mae and Freddie Mac apply loan-level price adjustments to cash-out refinances, so a cash-out is priced above an otherwise identical rate-and-term refinance. | Fannie Mae Loan-Level Price Adjustment Matrix |
Floor one
Who it fits
The usual guidelines. Every one of them is a starting point that an underwriter reads against the whole file, so treat a line you miss as a conversation rather than a closed door.
- Sufficient equity: generally a maximum of 80% loan-to-value on a conventional or FHA cash-out on a one-unit principal residence
- Ownership seasoning — usually at least six months on a conventional cash-out, with limited exceptions
- Credit, income and debt ratios that support the new, larger payment
- A current appraisal establishing the value the loan-to-value is measured against
- On a VA cash-out, a net tangible benefit test and the statutory seasoning requirements
- The property may be a principal residence, a second home or an investment property, at different caps
Ground floor
How it goes, top to bottom
Write down what the money is for, before anything else
Renovation, consolidation, tuition, a business. The purpose determines whether the trade is sensible, whether the interest is deductible, and whether a different structure would be better.
Work out the loan-to-value you need against the cap
80% on a conventional or FHA one-unit principal residence, 90% on a VA cash-out. If the amount you want breaches the cap, the answer is no, and finding that out before an appraisal fee is worth the ten minutes.
Run the break-even, and run the total interest both ways
Compare the new loan over a full new term against keeping the existing loan and borrowing separately. Then run the new loan on the remaining term of the old one — that comparison is usually the one that changes minds.
Appraisal and underwriting
The appraised value sets the loan-to-value and therefore the maximum cash. A value below expectation reduces the cash, and there is no appeal to a number you hoped for.
Closing, and then three days
On a refinance of your principal residence you have three business days after closing to cancel, and the funds are not disbursed until that period has run. Read the Closing Disclosure against the Loan Estimate in those three days, not afterwards.
Three ways to reach the equity, compared
| Feature | Cash-out refinance | Rate-and-term refinance | Home equity second |
|---|---|---|---|
| Loan-to-value cap | 80% conventional and FHA on a one-unit principal residence; 90% on a VA cash-out | Higher — up to 97% on some conventional programmes | Set by the lender |
| What happens to the first mortgage | Replaced | Replaced | Untouched |
| Term | A new full term unless you choose a shorter one | A new full term unless you choose a shorter one | Its own, usually shorter, term |
| Pricing | Priced above a rate-and-term refinance | The lowest of the three | Priced as a second lien |
| Costs charged on | The whole new loan | The whole new loan | The second lien only |
| Right to cancel | Three business days, except with your existing creditor | Three business days, except with your existing creditor | Three business days |
| Best when | You need a large sum and the existing first mortgage is not worth keeping | You are only changing the rate or the term | The existing first mortgage is worth keeping |
This table scrolls sideways on a narrow screen.
Questions this raises
How much cash can I actually take out?
Work backwards from the cap. On a conventional or FHA cash-out on a one-unit principal residence the new loan may not exceed 80% of the appraised value; on a VA cash-out it is 90% including the funding fee. Take that figure, subtract what you currently owe, then subtract closing costs and any prepaid items. What remains is the cash. The appraisal, not your estimate of value, sets the top of that calculation.
Should I use a cash-out refinance to pay off credit cards?
It lowers the rate and the payment, and both are real savings. What it also does is move the debt behind your house. Two questions decide it: whether the spending that created the balances has actually changed, and whether you would still be able to make the new payment if your income dropped. If either answer is uncertain, the cheaper interest rate is not the relevant number. Consider whether a fixed-term second lien, which keeps the first mortgage untouched, does the job with less at stake.
Does a lower rate always mean I pay less?
No, and this is the trap the payment hides. Restarting a thirty-year term several years into an existing loan re-extends the most interest-heavy part of the schedule. The payment can fall while the total interest over the life of the housing debt rises. Keeping the remaining term rather than resetting it is usually the fix, and the refinance calculator on this site shows both figures rather than only the payment.
Is the interest on the cash tax-deductible?
Only to the extent the money is used to buy, build or substantially improve the home that secures the loan. Since the Tax Cuts and Jobs Act, interest on home equity borrowing used for anything else — consolidating debt, tuition, a car — is not deductible as home mortgage interest. The mortgage looks identical either way; the deduction follows what the money did. Speak to a tax adviser about your own circumstances.
Put your own numbers through it
When does a refinance pay back? The refinance page prints the rule it followed beside the answer, and the address bar carries your inputs so the link you send is the answer you saw.
Or read every programme side by side.