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Cash-Out Refinance: How It Works and What to Know

A cash-out refinance is a way to access cash by replacing your current mortgage with a new, larger loan.

Kate Wood
Taylor Getler
Johanna Arnone
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A cash-out refinance is a new home loan for more than what you currently owe on your house. This new loan pays off your original mortgage, and you pocket the extra cash. Since the cash is coming from your home, it’s best spent on home improvements, debt consolidation or other financial needs.
You’ll be paying a larger mortgage with different terms, including a new interest rate, so it's important to weigh the pros and cons before committing to a cash-out refi.

What is a cash-out refinance?

A cash-out refinance is different from a standard refinance, which changes your interest rate and mortgage terms without affecting the balance. With a cash-out refinance, you get a new mortgage for a larger amount, so that you can finance your home and other expenses with one loan.
How much cash you’re eligible to access depends upon your home equity — how much your home is worth compared to how much you owe.

How much cash can you get from a cash-out refinance?

Steps to getting a cash-out refinance

  • Determine your home equity. Home equity is the market value of your home minus what you still owe. For example, if your home is worth $300,000 and you have $100,000 remaining on your loan, you have $200,000 in home equity.
  • Calculate the maximum loan you can take out. Lenders will usually allow you to borrow up to 80% of your home’s value. Using the previous example, you would multiply $300,000 times 0.80 for a maximum of $240,000. Remember that this isn’t the same as 80% of the purchase price; your home’s value may be different now than it was when you bought it. You can estimate your home’s value here. 
  • Subtract your current mortgage balance. From that new $240,000 loan, you’ll have to pay off what you still owe on your home: $240,000 - $100,000 = $140,000.
  • Estimate your total. In a cash-out refinance, you receive the difference between the balance on your previous mortgage and your new, larger mortgage. In this example, it's as much as $140,000. 
  • Shop rates from multiple lenders. This will help you to get the best deal. 
  • Weigh alternatives. Once you’ve researched available rates, calculate your new monthly mortgage payment and determine if it makes sense and is affordable for you. If not, you may be better off pursuing another type of loan. 
  • Submit an application. You’ll have to go through the appraisal and underwriting process before closing on the loan and accessing your cash. 
🤓 Nerdy Tip
Just like with your first mortgage, you’ll have to pay closing costs and fees on a cash-out refinance. These can total 2%-6% of the loan amount.

Cash-out refinance requirements

In order to get a cash-out refi, you'll have to meet lender requirements. These can vary across lenders, so it's smart to shop around for the best interest rate.
You'll likely need to meet these qualifications:

Debt-to-income ratio

Your DTI is your monthly debt payments, including your current mortgage, divided by your gross monthly income. For a cash-out refi, you'll usually need a DTI of 43% or less. If your DTI is over 43%, you may be required to have six months of reserves in the bank.

Credit score

You may qualify for a cash-out refinance with a score of 620, but a higher credit score will help you get a better interest rate.

Home equity

You'll usually need at least 20% equity in your home to qualify for a cash-out refinance. In other words, you'll need to have paid off at least 20% of the current appraised value of the house.

Seasoning requirement

With a conventional loan, you'll need to have owned the house for at least 12 months to qualify for a cash-out refinance, regardless of how much equity you have.
VA loan borrowers must wait at least 210 days, while borrowers who have a loan backed by the Federal Housing Administration need to have made 12 months of on-time payments before doing an FHA cash-out refinance.

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Pros and cons of a cash-out refinance

Whether a cash-out refinance is a wise move depends on your financial situation and how you plan to spend the money.
In a cash-out refinance, you can access a large amount of cash at a relatively low interest rate (compared to personal loans or credit cards, for example). However, since you’re using your home as the collateral, you risk losing your home if you can’t make the payments.

Pros:

  • Potentially lower interest rate. Though cash-out refinance rates tend to be higher than rate-and-term refinance rates, you might still end up with a lower interest rate if mortgage rates were higher when you originally bought your home. However, if you only want to lock in a lower interest rate on your mortgage and don’t need the cash, a standard rate-and-term refinance makes more sense.
  • Just one loan. Since it's a refinance, you'll deal with one loan payment per month. Other ways of accessing home equity require a second mortgage.
  • Access to more funds. Cash-out refinances are helpful with major expenses like a home renovation, because you generally can borrow much more than you could with a personal loan or by using credit cards.
  • Helpful for debt consolidation. Using the money from a cash-out refinance to pay off high-interest credit cards could save you thousands of dollars in interest.
  • May build credit. Paying off your credit cards in full with a cash-out refinance may build your credit score by reducing your credit utilization ratio — the amount of available credit you’re using.

Cons:

  • Foreclosure risk. Because your home is the collateral for any kind of mortgage, you risk losing it if you can’t make the payments. 
  • New terms. Your new mortgage will have different terms from your original loan, so review them carefully to understand what changed. Also, take a look at the total interest you'd pay over the life of the loan. Assuming you're refinancing into a new 30-year mortgage, that could add years of extra interest payments. 
  • Time-consuming. You're getting a new mortgage, and while you won't jump through all the hoops of a purchase loan, underwriting can still take weeks. If you need funds urgently — maybe your leaky roof is causing serious water damage and needs replacing ASAP — refinancing may not be your best bet.
  • Closing costs. You’ll pay closing costs for a cash-out refinance. Refinance closing costs are typically 2% to 6% of the loan. That’s $4,800 to $14,400 for a $240,000 refi. This can take a big bite out of the cash you'll receive at closing.
» MORE: When's the right time to refinance?

Alternatives to a cash-out refinance

There are ways to tap into your home equity without doing a cash-out refinance. Home equity loans and home equity lines of credit (HELOCs) also allow you to borrow against your home equity. They're both types of second mortgages, which means you take them out in addition to your current mortgage.

Home equity loan

With a home equity loan, you borrow a lump sum — not too different from what you'd get with a cash-out refinance. However, since you aren't touching your primary mortgage, its interest rate won't change. With a home equity loan, you can typically borrow around 80%-85% or more of your home’s value, minus what you still owe.
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Home equity line of credit

A HELOC is more flexible, giving you a line of credit that you draw from as needed. Most HELOC lenders let you borrow up to 80% of your home’s value, minus what you still owe, though some lenders set higher or lower limits.
Both home equity loans and HELOCs have minimal closing costs, but because they are second mortgages, their rates are generally higher than you'd get with a cash-out refinance.
Features of the loan
Cash-out refinance
Home equity loan
HELOC
Loan funding
You receive a lump sum at closing after paying off your original mortgage.
You receive a lump sum at closing (typically a percentage of your equity).
You can draw funds as needed, up to a certain limit (typically a percentage of your equity).
Terms
Repayment periods are often up to 30 years. Minimum payments include both interest and principal.
Repayment periods are often up to 30 years. Minimum payments include both interest and principal.
Begins with a draw period (typically 10 years) with interest-only minimum payments. This is followed by a repayment period (often up to 20 years) that requires you to pay back principal and interest.
Rates
Fixed or adjustable
Fixed
Variable, (though some lenders offer a fixed-rate option)
Borrowing limits
Typically 80% of your home equity. Some lenders allow for more.
Use NerdWallet’s cash-out refinance calculator for details.
Typically 80%-85% of your home equity. Some lenders allow for more.
Use NerdWallet’s home equity loan calculator for details.
Typically 80%-85% of your home equity. Some lenders allow for more.
Use NerdWallet's HELOC calculator for details.
Lenders
NerdWallet’s list of the best cash-out refinance lenders
NerdWallet’s list of the best home equity loan lenders
NerdWallet’s list of the best HELOC lenders
» MORE: Cash-out refinance vs. home equity loan or HELOC

Is a cash-out refinance a good idea?

Whether or not a cash-out refinance makes sense for you depends on your interest rate and how you plan to use the money. If you want to get a cash-out refinance to improve your financial position and can lower your monthly payments, it could be a smart move.
You’re using your home as collateral for a cash-out refinance, so it's important to make payments on your new loan on time and in full.
Frequently Asked Questions
How does a cash-out refinance work?
With a cash-out refinance, you take out a new mortgage that's for more than you owe on your existing home loan, but less than your home's current value. At closing, you'll receive the difference between the new amount borrowed and the loan balance.
How do you get the best cash-out refinance rate?
Shop around with multiple lenders to compare cash-out refinance rates. You may also be able to buy points to bring down your refinance interest rate. While you're comparing lenders, be sure to also check the costs and fees associated with getting the refinance. These don't affect your rate, but fewer added fees will lower your closing costs.
Does cash-out refinancing hurt your credit?
It depends. Cash-out refinancing is a kind of debt, which could lower your credit score. However, if you’re getting a cash-out refinance to pay off other debts, your credit profile could improve — especially if you weren’t able to keep up with regular payments before.
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