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How Does a Cash-Out Refinance Work?

You can tap into your home’s equity to get cash, but you’re going to take on more debt.

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Whether you’re looking to remodel your kitchen, pay off credit card bills or cover the cost of college tuition, you’re going to either borrow money or get access to a lump sum of cash. One way to come up with the funds is a cash-out refinance. 

With a cash-out refinance, you replace your current mortgage with a new, larger mortgage. The difference between the existing and new mortgage amounts, minus closing costs, goes to you in cash. That may sound appealing, but it’s important to understand all the details first.

What is a cash-out refinancing?

Cash-out refinancing is a loan option for homeowners who want to cash in on the equity they’ve built up on their property. Unlike traditional refinancing, where your new loan replaces your mortgage with a loan of the same amount, a cash-out refi replaces your current mortgage with a larger loan so you can receive the difference in cash. 

Most lenders will allow homeowners to borrow up to about 80% of their home’s equity. You can use the lump sum any way you choose, including for home improvements and even debt consolidation.

What does a cash-out refi look like?

If your home is valued at $300,000 and you still owe $100,000 on your mortgage, your equity is the difference: $200,000. If you go with a cash-out refinance, lenders typically require you to maintain 20% of your home’s equity, or $60,000 in this case, so you’d be able to cash out up to $140,000 to use toward that new kitchen.

Requirements for a cash-out refinance

Being a homeowner doesn’t automatically put you in the running for a cash-out refinance. Remember when you submitted information about your finances for your current mortgage? A cash-out refinance is going to feel similar. A lender will take a deep dive into your cash flow and your property’s condition to determine whether they feel comfortable loaning you the money. 

  • Check with each lender’s cash-out refinance requirements, as they’ll differ by institution. For example, some lenders will allow you to borrow only up to 80% of your home’s equity, while others will let you borrow up to 90%.
  • Make sure you have at least 20% equity in your home, the typical percentage lenders require before they consider you for cash-out refinancing.
  • Timing matters with cash-out refinancing. For example, Fannie Mae recently announced that homeowners needed to be in their current home for at least 12 months prior to being eligible for a cash-out refinance.
  • While most lenders will accept credit scores as low as 620, higher scores translate to lower rates. It’s wise to work to boost your credit score into 700-and-above territory. Lenders will consider your credit history, score and debt-to-income ratio. They’ll also look at your employment and how long you’ve lived in your house.

Benefits to cash-out refinancing

While cash-out refinancing isn’t for everyone, here are some of the potential advantages. 

It can help you consolidate and pay off debt: You can use the difference you’re paid from your new home loan to pay off your debt or transfer your debt into an account with a low interest rate. By paying off your debt, you could also improve your credit score.

It helps you make home improvements: Use the cash to finally renovate your kitchen, build an addition or perhaps redo your deck. By investing in your house, you’re increasing the value of your home.

It could get you a tax break: Cash-out refinancing could qualify you for a mortgage interest deduction, a tax break that allows you to reduce the amount you pay in taxes based on how much mortgage interest you’ve paid on your home during that year.

Disadvantages to cash-out refinancing

There are downsides. Here are a few other aspects to consider before committing to a new and larger loan.

It ups your risk of foreclosure: Mortgage loans are secured, meaning they are tied to a piece of collateral, i.e., your home. If you stop making payments on your loan, you could lose your home. That’s why using money you receive from a cash-out mortgage to pay off an unsecured loan, such as a credit card, is considered risky.

It’ll change your loan terms: Because you’re taking on a new loan, you’ll most likely have to agree to new terms for your mortgage. You’ll want to check the new interest rates, fees and term length before agreeing to the loan. In the current market, cash-out refinancing can be a very costly move: Data from Freddie Mac shows that borrowers who refinanced in the first half of 2023 did so with average rates of 6.4% – more than 2 points higher than the average rates for their old loans. That increased monthly payments by an average of $591.

You’ll pay closing costs: Just like when you bought your home, you’ll need to pay closing costs when you refinance it. This is typically 2% to 5% of your total mortgage.

Alternatives to cash-out refinancing


A HELOC, or a home equity line of credit, offers homeowners separate loans with revolving credit instead of one large loan. You’ll still have to pay closing costs for a HELOC, however, and your home will still be used as collateral.

Personal loan

Going with a personal loan is another route to access money for your home improvement projects, with the added bonus of not having to use your house as collateral. But because it’s an unsecured loan, it’ll have much higher interest rates than you’ll find with cash-out refinancing.

Reverse mortgage

If you’re 62 or older and want to make home improvements, you could apply for a reverse mortgage. A reverse mortgage allows you to cash in on your home’s equity and relieves you of monthly mortgage payments. But it uses up your equity, which means fewer assets for you and your heirs. The amount borrowed will have to be paid back when the homeowner either moves out of the home, sells the property or dies. 

Home equity loan

Like cash-out refinancing, home equity loans provide you with a lump sum of cash. Home equity loans won’t alter your loan terms, unlike a cash-out refinance, and the interest rate is fixed. But since it’s a second mortgage, with a separate payment, that interest rate tends to be much higher than a first mortgage. 

Bottom line

A cash-out refinance can be a useful financial move for a homeowner who has a sizable chunk of equity and needs money to complete a major project or pay off another large expense. In some cases, a cash-out refinance comes with potential tax benefits, too. However, don’t let the advantages distract you from the downsides. You’ll be taking on more debt – and you’ll be putting your house on the line in the process.


You’ll be opening a new loan and increasing the overall amount of money you owe. Both of these are key factors in determining your credit score. 

Bankrate’s data shows that the average 30-year refinance rates hovered around 7.74% in the third week of September, while 15-year refinance rates were 6.87%.

Yes. You’re tapping into the equity you’ve accumulated in the property by taking the cash out. This ultimately means that it is going to take you more time to pay off your house. 

If you’re using some of the money from a cash-out refi to make improvements to your property that will increase its value, you may be eligible for some deductions on your taxes. However, make sure you consult a tax professional to understand whether you qualify for the savings.

Yes. A lender will need to verify your property value prior to loaning you the money.

Amanda Push is a writer based in Colorado who covers personal finance, technology, safety and security, moving, and more. Her writing has also been featured at,,, and
David McMillin writes about credit cards, mortgages, banking, taxes and travel. Based in Chicago, he writes with one objective in mind: Help readers figure out how to save more and stress less. He is also a musician, which means he has spent a lot of time worrying about money. He applies the lessons he's learned from that financial balancing act to offer practical advice for personal spending decisions.
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