A cash out refinance is a mortgage refinancing option that allows you to borrow more than you owe on your current mortgage and receive the difference in cash. This financial strategy lets homeowners tap into their home equity for major expenses, debt consolidation, home improvements, or other financial needs.
A cash out refinance is a mortgage refinancing strategy where you replace your existing mortgage with a new, larger loan and receive the difference in cash. This allows you to access your home's equity while potentially securing better loan terms.
Cash Out Refinance Example
If your home is worth $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity. With a cash out refinance, you might take out a new $320,000 mortgage, pay off your existing $250,000 loan, and receive $70,000 in cash (the difference).
Key Benefits of Cash Out Refinancing
Access to Large Amounts: Borrow significant sums based on your home equity
Lower Interest Rates: Typically lower than credit cards or personal loans
Fixed Payments: Predictable monthly payments with fixed-rate loans
Tax Advantages: Potential tax deductions when used for home improvements
Debt Consolidation: Pay off high-interest debts with lower-rate mortgage funds
How Does a Cash Out Refinance Work?
Understanding how a cash out refinance works is essential for making an informed decision about accessing your home equity.
The Cash Out Refinance Process
Application: Apply with a lender and provide financial documentation
Home Appraisal: Professional appraisal determines your home's current value
Loan Approval: Lender reviews your creditworthiness and debt-to-income ratio
Loan Terms: Finalize interest rate, loan amount, and repayment terms
Closing: Sign documents, pay closing costs, and receive your cash
Loan Payoff: New loan pays off existing mortgage automatically
Important Considerations
Cash out refinancing increases your mortgage balance and monthly payments. Ensure you can comfortably afford the new payment amount and consider the long-term financial impact of extending your loan term.
Loan-to-Value (LTV) Requirements
Most lenders require you to maintain at least 20% equity in your home after the cash out refinance. This means you can typically borrow up to 80% of your home's value, minus your existing mortgage balance.
FHA Cash Out Refinance
The FHA cash out refinance program offers government-backed refinancing options with more flexible qualification requirements than conventional loans.
FHA Cash Out Refinance Benefits
Lower Credit Score Requirements: Accept scores as low as 580 with 10% equity
Higher LTV Ratios: Borrow up to 85% of your home's value
Flexible Income Requirements: More lenient debt-to-income ratios
Assumable Loans: Future buyers can assume your FHA loan
Requirement
FHA Cash Out Refinance
Conventional Cash Out
Minimum Credit Score
580 (10% equity) / 500 (15% equity)
620-640
Maximum LTV Ratio
85%
80%
Debt-to-Income Ratio
Up to 57%
Up to 43-50%
Mortgage Insurance
Required (MIP)
Required if LTV > 80% (PMI)
FHA Cash Out Refinance Requirements
Owner-occupied primary residence
Current on mortgage payments for past 12 months
Demonstrate ability to repay the new loan
Property must meet FHA standards
No more than one 30-day late payment in past year
Cash Out Refinance vs HELOC
When comparing a cash out refinance vs HELOC (Home Equity Line of Credit), consider the differences in structure, costs, and repayment terms.
Cash Out Refinance Advantages
Fixed interest rate and payments
Lower interest rates than HELOCs
No variable rate risk
Predictable monthly payments
Potential to improve loan terms
HELOC Advantages
Access funds as needed
Lower closing costs
Interest-only payment option
Flexibility to repay early
Keep existing mortgage terms
Feature
Cash Out Refinance
HELOC
Interest Rate Type
Fixed or Variable
Variable (adjustable)
Payment Structure
Fixed monthly payments
Interest-only then principal + interest
Access to Funds
Lump sum at closing
Draw as needed during draw period
Closing Costs
2-5% of loan amount
$500-$2,000
Tax Deductibility
Yes (if used for home improvements)
Yes (if used for home improvements)
Cash Out Refinance Calculator
A cash out refinance calculator helps you determine how much cash you can access and what your new monthly payments will be.
Calculate Your Cash Out Refinance
Use our advanced refinance calculator to estimate your cash out amount, new monthly payments, and total costs. Get personalized results based on your home value and current mortgage.
Current Home Value: Recent appraisal or market estimate
Existing Mortgage Balance: Amount you currently owe
Desired Cash Amount: How much cash you need
New Interest Rate: Current market rates for your situation
Loan Term: Repayment period (15, 20, or 30 years)
Closing Costs: Fees associated with the refinance
What the Calculator Shows
Maximum cash available based on LTV limits
New monthly mortgage payment
Total interest paid over loan term
Break-even point for refinancing costs
Monthly payment difference from current mortgage
How Long Does a Cash Out Refinance Take?
Understanding how long a cash out refinance takes helps you plan for when you'll receive your funds and new loan terms.
Typical Timeline: 30-45 Days
Phase
Duration
Key Activities
Application & Documentation
3-7 days
Submit application, provide financial documents
Processing & Underwriting
15-20 days
Credit check, income verification, appraisal
Appraisal
7-14 days
Schedule and complete home appraisal
Final Approval
3-5 days
Underwriter final review and approval
Closing Preparation
3-5 days
Final documents, closing disclosure review
Closing
1 day
Sign documents, receive funds
Factors That Can Extend the Timeline
Complex Income Situations: Self-employment or multiple income sources
Property Issues: Appraisal complications or property condition concerns
Credit Issues: Additional documentation required for credit history
High Loan Amounts: Jumbo loans may require additional review
Market Conditions: High demand periods may cause delays
How to Speed Up the Process
Gather all required documents before applying
Respond quickly to lender requests
Keep your financial situation stable during processing
Choose experienced lenders and loan officers
Avoid major purchases or credit changes during the process
Is Cash Out Refinance Taxable?
Understanding whether a cash out refinance is taxable is crucial for proper financial planning and tax preparation.
Good News: Cash Out Refinance is Not Taxable Income
The cash you receive from a cash out refinance is not considered taxable income by the IRS. You're borrowing against your home equity, not earning income, so you don't owe taxes on the cash received.
Tax Deduction Opportunities
While the cash isn't taxable, you may qualify for tax deductions in these situations:
Home Improvements: Interest on funds used for qualifying home improvements may be deductible
Investment Property: Interest may be deductible if used for investment purposes
Business Use: Interest on funds used for business purposes may be deductible
Important Tax Considerations
Tax laws changed in 2018. Mortgage interest is only deductible on up to $750,000 of qualified residence loans, and only when funds are used to buy, build, or substantially improve your home. Consult a tax professional for your specific situation.
When Cash Out Refinance Could Have Tax Implications
Forgiven Debt: If any portion of your mortgage is forgiven, it may be taxable
Investment Use: Using cash for investments may have different tax implications
Rental Property: Different rules apply for investment properties
State Taxes: Some states have different rules for mortgage interest deductions
Requirements and Qualifications
Meeting cash out refinance requirements is essential for loan approval and favorable terms.
Basic Qualification Requirements
Credit Score: Typically 620+ for conventional loans, 580+ for FHA
Debt-to-Income Ratio: Usually 43% or lower (including new mortgage payment)
Home Equity: At least 20% equity remaining after cash out
Income Verification: Stable income history and documentation
Property Requirements: Primary residence, second home, or investment property
Documentation Needed
Recent pay stubs (30 days)
Tax returns (2 years)
W-2 forms (2 years)
Bank statements (2-3 months)
Current mortgage statements
Homeowners insurance policy
Property tax records
Factors That Affect Approval
Factor
Minimum Requirement
Preferred
Credit Score
620 (Conventional)
740+
Debt-to-Income Ratio
43%
36% or lower
Loan-to-Value Ratio
80%
75% or lower
Cash Reserves
2 months payments
6+ months payments
Pros and Cons of Cash Out Refinancing
Carefully weighing the advantages and disadvantages helps you make an informed decision about cash out refinancing.
Advantages
Lower Interest Rates: Usually lower than credit cards or personal loans
Large Loan Amounts: Access significant cash based on home equity
Fixed Payments: Predictable monthly payments with fixed-rate loans
Closing Costs: Significant upfront expenses (2-5% of loan)
Extended Loan Term: May reset your mortgage timeline
Risk of Foreclosure: Home serves as collateral
Reduced Equity: Less ownership stake in your home
Market Risk: Home values can decline
When Cash Out Refinancing Makes Sense
Current mortgage rate is significantly higher than available rates
You need funds for high-return investments or home improvements
Consolidating high-interest debt with lower mortgage rates
You have stable income and can afford higher payments
You plan to stay in the home for several years
When to Consider Alternatives
You're close to paying off your current mortgage
Current mortgage rates are much higher than your existing rate
You're planning to sell your home in the near future
Your income is unstable or declining
You're already struggling with your current mortgage payment
Ready to Explore Your Options?
Use our comprehensive mortgage calculators to compare cash out refinancing with other borrowing options and determine the best strategy for your financial situation.
Frequently Asked Questions About Cash Out Refinancing
Most lenders allow you to borrow up to 80% of your home's value with conventional loans, or 85% with FHA loans. The exact amount depends on your home's appraised value, existing mortgage balance, and lender requirements.
Yes, options exist for borrowers with lower credit scores. FHA cash out refinances accept scores as low as 580, and some lenders offer conventional loans to borrowers with scores in the 580-620 range, though with higher interest rates.
Closing costs typically range from 2-5% of the loan amount. For a $300,000 loan, expect $6,000-$15,000 in closing costs, including appraisal fees, origination fees, title insurance, and other charges.
You can use the funds for any purpose: home improvements, debt consolidation, education expenses, investment opportunities, or emergency expenses. However, using funds for home improvements may provide tax advantages.
Initially, the credit inquiry may temporarily lower your score by a few points. However, if you use the funds to pay off high-interest debt and reduce your overall credit utilization, your score may improve over time.
Yes, but requirements are stricter. You'll typically need higher credit scores, larger down payments, and more cash reserves. Maximum LTV ratios are usually lower (75% or less) for investment properties.
Conclusion: Making the Right Cash Out Refinance Decision
A cash out refinance can be a powerful financial tool when used strategically. The key is understanding your financial goals, comparing it with alternatives like HELOCs, and ensuring you can comfortably afford the new monthly payments.
Before proceeding with a cash out refinance, consider:
Your long-term financial goals and timeline
Current interest rates compared to your existing mortgage
The total cost of refinancing versus other borrowing options
Your ability to handle the increased monthly payment
The intended use of the cash and potential returns
Whether you choose a conventional cash out refinance or an FHA cash out refinance, careful planning and comparison shopping will help you secure the best terms and make the most of your home equity.
Start Planning Your Cash Out Refinance
Use our advanced calculators to model different scenarios and make informed decisions about accessing your home equity.