Cash-Out Refinance
Turn home equity into cash for home improvements, debt payoff, or major purchases. Learn the rules, costs, and smart alternatives before you sign.
How It Works (5 Steps)
- Check equity: You need at least 20% equity left after the loan (80% max LTV on most owner-occupied homes).
- Apply: Submit income, credit, and property docs—similar to a purchase loan.
- Appraisal: Lender orders a new valuation to determine how much cash you can take.
- Underwriting: Loan officer verifies you can afford the new, larger payment.
- Closing: Sign papers; cash is wired to your bank account 3–5 days later.
Max Cash-Out by Loan Type
- Conventional: 80% LTV (leave 20% equity)
- FHA: 80% LTV
- VA: 90% LTV (funding fee added)
Costs to Expect
- Closing costs: 2%–5% of new loan amount
- Appraisal: $500–$700
- Title & escrow: $1k–$2k
- Points (optional): 0%–1% to buy down rate
Pros
- Lower rate than personal loans or credit cards
- Interest may be tax deductible if used to improve home
- One monthly payment vs juggling multiple debts
Cons
- Reduces equity; larger monthly payment
- Closing costs can eat into cash received
- Risk of foreclosure if you can’t pay
Tax Rules (Consult Your CPA)
- Home-improvement use: Interest is generally deductible.
- Debt consolidation or personal use: Not deductible.
- Equity debt limit: Interest deductible on up to $750k total mortgage debt.
Real Example
Home value: $400k
Current loan: $220k
Max new loan (80% LTV): $320k
Cash received: ~$92k (minus $5k closing costs)
New payment: $2,150 vs old $1,480 (30-year fixed at 7%)
Cash-Out vs HELOC
| Feature | Cash-Out Refi | HELOC |
|---|---|---|
| Rate | Fixed | Variable |
| Closing costs | Higher | Lower |
| Monthly payment | One payment | Interest-only draw period |
| Best for | Large, one-time needs | Ongoing access |
When to Say No
- You plan to move within 2–3 years (closing costs won’t breakeven).
- You’re already paying PMI and new LTV keeps it in place.
- You struggle with monthly budgeting—larger payment increases risk.