What Is a Cash-Out Refinance Loan? How It Works and How Much You Can Take Out
This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Consult a qualified professional about your situation.
A cash-out refinance loan replaces your existing mortgage with a new, larger first mortgage and pays you the difference in cash at closing. Freddie Mac caps that new loan at 80% of the home’s value on a one-unit primary residence, so a $400,000 home carrying a $200,000 balance supports a $320,000 loan and roughly $120,000 in gross proceeds before closing costs come out.1
What changes is the size of your loan, not the number of loans. You end up with one mortgage and one payment, unlike a home equity loan or HELOC that adds a second lien behind the one you already have. It is also not a rate-and-term refinance, which strictly limits cash back.
Learn what a cash-out refinance loan is, how the proceeds are calculated, and how it differs from a rate-and-term refinance. If you’re still mapping the landscape, start with our refinancing and home equity guide.
Key takeaways:
- The ceiling is 80% of appraised value: Freddie Mac limits a cash-out refinance to 80% loan-to-value on a one-unit primary residence, and FHA holds it to 80% of adjusted value.2
- Your proceeds equal 80% of value minus what you owe: On a $400,000 home with a $200,000 payoff, that’s $320,000 minus $200,000, or about $120,000 before closing costs.
- A rate-and-term refinance caps cash back at 1% or $2,000: Fannie Mae limits a limited cash-out refinance to the greater of 1% of the new loan amount or $2,000, the bright line between the two transactions.
What is a cash-out refinance?
A cash-out refinance is a new first mortgage, larger than the loan it pays off, that converts part of your home equity into cash at closing. Equity is the gap between what your home appraises for and what you owe against it, and this is the transaction that turns a slice of it into spendable money.
Fannie Mae lists the permitted uses of the new loan amount plainly: paying off the unpaid principal balance of the existing first mortgage, financing closing costs, points and prepaid items, paying off outstanding subordinate liens, and taking equity out of the property that may be used for any purpose. That last phrase is the whole product. The money is not earmarked.
It is one branch of a family that also includes rate-and-term, streamline and renovation refinances; our overview of the types of refinancing shows where each fits.
How does a cash-out refinance work?
A cash-out refinance runs through the same four steps as any refinance, and step three decides how much cash you actually receive.
- 1. Confirm you’re seasoned: Fannie Mae requires at least one borrower to have been on title for six months before the new loan disburses, and an existing first mortgage being paid off must be at least 12 months old, note date to note date. Narrow exceptions apply.
- 2. Apply and document the file: Income, assets, credit and the payment history on every mortgage you hold get verified, same as on a purchase. Ask each lender for a Loan Estimate so you can compare offers on a standardized form.
- 3. The appraisal sets the value: Your opinion of what the house is worth does not enter the math. An appraiser’s number, times the program’s maximum loan-to-value ratio, is the hard ceiling on your new loan.
- 4. Close and fund: The new loan pays off the old one and any subordinate liens, closing costs are settled, and whatever remains is disbursed to you.
The steps after you apply, from the payoff statement to the right to cancel, are in the section comparing FHA and VA cash-out refinances with conventional.
How much cash can you take out?
Take the appraised value, multiply it by the program’s maximum loan-to-value ratio, then subtract everything you owe against the house. At an 80% ceiling that is value × 0.80, minus your payoff, minus any second lien that has to be cleared. Run it on a $400,000 Michigan home with a $200,000 mortgage balance:
- Maximum new loan: $400,000 × 80% = $320,000.
- Less the existing payoff: $320,000 − $200,000 = $120,000.
- Gross proceeds: about $120,000, before closing costs and any subordinate liens come out of that figure rather than your pocket.
Two things bend that number. Closing costs are usually financed in, which shrinks what reaches your bank account; our breakdown of refinancing closing costs shows which lines you can shop. And if the appraisal lands low, the ceiling drops 80 cents for every dollar of lost value.
That 80% is the one-unit primary residence ceiling, and it moves once occupancy, unit count or program changes, conventional, FHA and VA each publish their own maximum, so run yours off the by-program table on this page before you size the request.
How is a cash-out refinance different from a rate-and-term refinance?
The dividing line is a dollar amount. Fannie Mae calls a rate-and-term refinance a limited cash-out refinance and lets the borrower receive no more than the greater of 1% of the new loan amount or $2,000, which is $3,000 on a $300,000 loan. Cross that line and it is a cash-out refinance, with cash-out rules and cash-out pricing.
Pricing is the second difference. Fannie Mae’s guide states that a loan-level price adjustment applies to certain cash-out refinance transactions based on LTV ratio and credit score, an adjustment a limited cash-out refinance does not carry. When your goal is a lower rate or a shorter term, the benefits of a rate-and-term refinance usually make it the cheaper route.
| Feature | Cash-out refinance | Rate-and-term refinance | Home equity loan or HELOC |
|---|---|---|---|
| What happens to your first mortgage | Replaced with a larger loan | Replaced with a roughly equal loan | Untouched; a new lien sits behind |
| Loans and payments afterward | One | One | Two |
| Cash to you at closing | 80% of value minus payoff and costs | The greater of 1% of the loan or $2,000 | Set by the lender’s combined LTV limit |
| Loan-to-value ceiling | 80% on a one-unit primary residence | Program-set, and higher than cash-out | Set by the individual lender |
| Pricing adjustment | Carries a cash-out price adjustment by LTV and credit score | Not subject to the cash-out adjustment | Priced separately from the first mortgage |
| Best when | You want equity and your rate isn’t worth protecting | You want a better rate or term, not cash | You want equity and your rate is worth keeping |
That last row is the decision in miniature. If your first mortgage carries a rate you’d hate to give up, adding a second mortgage or a home equity line of credit protects it, at the cost of a second payment.
What trade-offs come with the cash?
Three, in short: you surrender the rate on your existing balance, which matters most when it sits well below where Freddie Mac’s weekly survey has the market, closing costs come out of the proceeds, and the tax treatment is narrower than most borrowers assume, because the IRS treats only the portion used to buy, build or substantially improve the home as home acquisition debt, and any additional debt not used for those purposes isn’t home acquisition debt.3 There is also a structural change worth naming: consolidating credit cards into a mortgage moves unsecured debt behind a lien on your home. Weighing all of that against the upside has its own page, the pros and cons of cash-out refinancing runs each cost against each benefit and shows the break-even math.
How do FHA and VA cash-out refinances compare with conventional?
The 80% conventional ceiling above is one of three. Each program sets its own maximum loan and its own waiting period, and those two rules decide whether you can start at all.
| Program | Ceiling on the new loan | Waiting period | Occupancy |
|---|---|---|---|
| Conventional (Fannie Mae) | 80% of appraised value on a one-unit primary residence; lower on second homes, 2 to 4 units and investment property | Six months on title, and the first mortgage being paid off at least 12 months old | Primary, second home or investment, at different ceilings |
| FHA | 80% of adjusted value, for both the loan and any combined liens | Owned and lived in as your principal residence for the 12 months before the FHA case number is assigned | Owner-occupied principal residence only |
| VA | Up to 100% of the reasonable value VA sets | When refinancing a VA loan: the later of 210 days after the first payment or the sixth monthly payment | You must live in the home |
What FHA adds
FHA wants proof that every mortgage payment over the last 12 months was made within the month it was due, plus at least six months of payments on the current loan. The lender confirms you lived in the home with employment records or utility bills. An FHA cash-out also carries an upfront and an annual mortgage insurance premium. These rules come from HUD’s Single Family Housing Policy Handbook 4000.1.
What VA adds
VA’s own rule, at 38 CFR 36.4306, lets the new loan reach 100% of the home’s reasonable value. Lenders can set a lower limit of their own, so the ceiling may differ from one lender to the next. You need a Certificate of Eligibility, and VA charges a funding fee on a cash-out refinance: 2.15% of the loan amount on first use and 3.3% after that. Veterans who receive VA compensation for a service-connected disability, and certain others, do not pay it. See VA’s funding fee page for the full list.
The steps after you apply
Every program follows the same order: apply and compare Loan Estimates, appraise and underwrite, then close. Order a payoff statement for every lien early, because payoffs expire and a late one delays closing. On your primary home, you generally have until midnight of the third business day after signing to cancel, and the lender cannot release the money until that window ends. That is why a refinance funds a few days after the signing table.
How Align picks the refinance that fits
Rate and term, cash-out, FHA streamline and VA IRRRL each solve a different problem. Samantha starts with what you are trying to change and what it costs to get there, then prices that refinance across multiple wholesale lenders.
In late 2022, Freddie Mac found borrowers who got two quotes could have saved as much as $600 a year, and four or more quotes more than $1,200 a year.
Align is paid by the lender, not by a fee you pay us, and federal rules bar a broker's pay from changing with your rate or fees.
Run a refinance break-even review Cash-out refinance in Michigan
Sources: Freddie Mac, When rates are higher, borrowers who shop around save (February 2023); Regulation Z, 12 CFR 1026.36(d).
FAQ: Cash-out refinance loans
Here are answers to common questions about cash-out refinance loans.
How much cash can I get from a cash-out refinance?
Take 80% of your home’s appraised value and subtract your mortgage balance. On a $400,000 home with $200,000 owed, that’s $320,000 minus $200,000, or about $120,000 before closing costs. The appraisal sets the value, not your estimate, and the ceiling varies by program and occupancy.
Is a cash-out refinance better than a HELOC?
It depends on the rate you already have. If your first mortgage is priced well below today’s market, replacing the whole loan to reach your equity is expensive, and a line of credit that leaves it untouched usually wins. If your rate is at or above market, a cash-out refinance resets it and delivers cash in one transaction. See how a HELOC works.
Does a cash-out refinance hurt your credit?
Temporarily, a little. The credit inquiry and the new account cause a short dip, and the new loan resets the age of your mortgage tradeline. The larger effect is what you do with the money: paying off revolving balances typically lifts your score by cutting utilization, while running those cards back up pushes the other way. Our pros and cons of cash-out refinancing covers the follow-through.
Is cash-out refinance money taxable?
No. Loan proceeds are borrowed money, not income, so the cash you receive at closing is not taxable. Whether the interest is deductible is a separate question that turns on how the money is spent. Talk to a tax professional, and see refinancing closing costs for how the fees are handled at the table.
The bottom line on cash-out refinance loans
A cash-out refinance loan replaces your mortgage with a larger first mortgage and hands you the difference in cash. Freddie Mac caps it at 80% of value on a one-unit primary residence and FHA holds cash-out refinances to 80% of adjusted value, so a $400,000 home with a $200,000 balance produces roughly $120,000 in gross proceeds before costs. The line between this and a rate-and-term refinance is a dollar figure: the greater of 1% of the loan amount or $2,000.
If you’re ready to find out what your equity is worth, talk to Align Lending, we’ll shop your scenario across our lender network and put the cash-out and rate-and-term numbers in front of you side by side. Call 248-506-5727 or start online today.
Footnotes:
1. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your loan amount, proceeds and terms depend on your appraised value, payoff balances, program, credit and market conditions, and will be itemized on your Loan Estimate and Closing Disclosure. Return to text.
2. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA cash-out refinance loan-to-value and occupancy requirements are set by HUD in Mortgagee Letter 2019-11 and Single Family Housing Policy Handbook 4000.1 and are subject to change. Return to text.
3. This is general information, not tax advice. Deductibility depends on your individual circumstances, on how the proceeds are used, and on whether you itemize. Consult a qualified tax professional about your situation. Return to text.
Sources: maximum LTV/TLTV/HTLTV ratios for cash-out refinance mortgages of 80% on a 1-unit primary residence, 75% on a 2-4 unit primary residence, second home and 1-unit investment property, and 70% on a 2-4 unit investment property, Freddie Mac Single-Family, Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages. Permitted uses of cash-out refinance proceeds, the six-month title seasoning requirement, the 12-month note-date-to-note-date seasoning of an existing first mortgage being paid off and its exceptions, and the statement that a loan-level price adjustment applies to certain cash-out refinance transactions based on LTV ratio and credit score, Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions. Limited cash-out refinance cash-back limit of the greater of 1% of the new refinance loan amount or $2,000, Fannie Mae Selling Guide B2-1.3-02, Limited Cash-Out Refinance Transactions. FHA maximum LTV and CLTV of 80 percent of the Adjusted Value on cash-out refinance mortgages, effective for case numbers assigned on or after September 1, 2019, HUD Mortgagee Letter 2019-11. FHA requirement that the property securing a cash-out refinance be owned and occupied by the borrower as a principal residence for the 12 months prior to the date of case number assignment, HUD Single Family Housing Policy Handbook 4000.1, II.A.8.d.v. VA cash-out loan amount not to exceed 100 percent of the reasonable value of the property, 38 CFR § 36.4306. Home acquisition debt defined as debt used to buy, build or substantially improve a qualified home, and the rule that additional debt not used for those purposes is not home acquisition debt, IRS Publication 936. Weekly mortgage rate benchmark, Freddie Mac Primary Mortgage Market Survey.
This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Loan-to-value limits, seasoning rules, pricing adjustments and program requirements change and vary by lender, loan program, occupancy and property type; confirm your figures with your Loan Estimate and Closing Disclosure and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.
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