Cash-Out Refinance
A cash-out refinance replaces an existing mortgage with a new, larger loan, allowing the borrower to withdraw the difference as cash. The borrower receives the excess funds at closing and begins repaying the new, higher-balance mortgage under updated terms.
What This Means
How Cash-Out Refinancing Works
In a cash-out refinance, the borrower takes out a new mortgage for more than the remaining balance on the current loan. After paying off the existing mortgage and covering closing costs, the borrower receives the remaining amount as a lump sum. For example, a homeowner with a property worth and a remaining mortgage balance of $200,000 might refinance for $280,000, receiving approximately $80,000 in cash (minus closing costs).
Loan-to-Value and Program Limits
Lenders impose maximum loan-to-value (LTV) ratios on cash-out refinances, which are typically lower than for rate-and-term refinances:
- Conventional (Fannie Mae/Freddie Mac): Maximum for primary residences
- FHA: Maximum , requires the home to have been owned and occupied for at least 12 months
- VA: Up to for eligible veterans (the only major program allowing full equity extraction)
Interest rates on cash-out refinances are generally than comparable rate-and-term refinances, reflecting the increased risk to the lender from a higher loan balance.
Common Uses and Considerations
Borrowers commonly use cash-out refinance proceeds for home improvements, debt consolidation, education expenses, or investment. The new mortgage replaces the original loan entirely, which means the borrower's interest rate, term, and monthly payment all reset. Borrowers should evaluate whether the total cost of the new loan, including closing costs typically ranging from of the loan amount, justifies the cash received. Unlike a home equity loan or HELOC, a cash-out refinance does not add a second lien; it restructures the primary mortgage.