A cash-out refinance lets you tap home equity by replacing your mortgage with a larger loan. Here is when it makes sense, what it costs, and how it compares to a HELOC.
Cash-Out Refi — Key Numbers
80%
80%
90%
7.05%
+0.25–0.5%
620 (conv)
What Is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new, larger loan — and you receive the difference in cash. For example, if you owe $200,000 on a home worth $400,000, you might refinance to a $320,000 mortgage and receive $120,000 in cash (keeping 20% equity — the standard lender requirement).
This is different from a HELOC or home equity loan, which add a second loan on top of your existing mortgage. A cash-out refi replaces your entire existing mortgage with one new loan at a new rate.
How Much Can You Cash Out?
The maximum cash-out amount is determined by lender LTV limits:
Loan Type
Max LTV
Example: $400K Home
Max Cash (if $200K owed)
Conventional
80%
$320,000 max loan
$120,000 cash
FHA Cash-Out
80%
$320,000 max loan
$120,000 cash
VA Cash-Out
90%
$360,000 max loan
$160,000 cash
Jumbo Cash-Out
70–75%
$300,000 max loan
$100,000 cash
Best Uses of Cash-Out Funds
High-Value Uses (ROI Positive)
Home improvements that add value: Kitchen remodel, bathroom addition, finished basement. Many improvements return 60–80%+ of cost in home value.
Paying off high-interest debt: Credit cards at 20–28% APR vs. mortgage at 7% — the math is compelling if you maintain the lower rate.
Investment property down payment: Leveraging equity to acquire income-producing assets
Education funding: Mortgage rates are typically far lower than student loan rates
Risky Uses (Approach with Caution)
Paying off credit cards without addressing spending habits (often re-accumulates debt)
Luxury expenses or vacations (no financial ROI)
Starting a business (high failure rate; risking your home)
Investing in volatile assets with borrowed money secured by your home
Cash-Out Refinance vs HELOC vs Home Equity Loan
Feature
Cash-Out Refi
HELOC
Home Equity Loan
Rate Type
Fixed (usually)
Variable
Fixed
Current Rate Range
7.0–7.5%
8.5–9.5%
8.0–9.0%
Replaces Primary Mortgage?
Yes
No
No
Access to Funds
Lump sum
Revolving credit line
Lump sum
Closing Costs
2–5% of new loan
2–3% (often waived)
2–3%
Best For
Large lump sum, lower rate
Ongoing needs, flexibility
Specific lump sum
Tax Deductibility
Interest on first $750K
If used for home improvement
If used for home improvement
Frequently Asked Questions
It depends on what you do with the money and the rate you're locking in. Cash-out refinancing makes most sense when: (1) your new rate is close to your current rate (or you have a high existing rate to reduce), (2) you'll use the cash for high-ROI purposes like home improvements or paying off high-interest debt, and (3) you plan to stay in the home long enough to recoup closing costs. Using home equity for consumer spending is generally inadvisable.
Yes, in several ways. The application triggers a hard inquiry (−5 to −10 points). The new loan appears as a new account, reducing average account age. The higher loan balance increases debt amounts. These are generally temporary effects. If you're using the cash to pay off credit card debt, the reduction in revolving utilization may actually improve your score within 60 days.
Most conventional and FHA cash-out refinances require a 12-month seasoning period (you must have owned the home for at least 12 months and made at least 12 monthly payments). VA cash-out refinances also require 210 days and at least 6 payments. This prevents abuse of the cash-out refinance as a quick flip mechanism.
Disclaimer: Smart Mortgage Guide provides educational content only. We are not a licensed mortgage lender, broker, or financial advisor. Rates, limits, and program details are subject to change. Always consult with a licensed mortgage professional before making financial decisions.