By the RefiPoint Editorial Team · Updated June 2026 · Researched from authoritative sources. General information, not professional advice.
A cash-out refinance lets you turn part of your home equity into cash by replacing your existing mortgage with a new, larger one. It can be a sensible way to fund a value-adding renovation or clear punishing credit-card balances — but it also takes debt that wasn't tied to your home and secures it against the roof over your head. This guide explains the mechanics, the limits, the costs, the tax angle, and the risks, so you can decide whether tapping equity is the right move or a costly one.
In a standard "rate-and-term" refinance, your new loan simply pays off the old one at a different rate or term — no cash changes hands. A cash-out refinance is different: you borrow more than you currently owe, the new loan pays off the old balance, and you pocket the difference (minus closing costs) as a lump sum. You are not getting "free money"; you are increasing your mortgage debt and converting equity you already had into spendable cash that you will pay back, with interest, over the life of the new loan.
Because the new loan starts a fresh amortization schedule, a cash-out refinance usually resets your term — often back to 30 years — and typically carries a slightly higher interest rate than a rate-and-term refinance. Lenders price the added risk of a larger loan against your equity into that rate, so expect to pay a small premium for the cash.
The amount you can borrow is governed by the loan-to-value ratio (LTV) — your new loan divided by the home's appraised value. Loan programs set the caps, not individual loan officers:
These caps exist to protect both you and the lender from a downturn that could leave the loan worth more than the house. Always confirm the current limit for your specific program, because agency and government guidelines change.
Suppose your home appraises at $400,000 and you still owe $220,000. With a conventional 80% LTV cap, here is how the numbers shake out (figures are illustrative):
| Item | Amount |
|---|---|
| Appraised home value | $400,000 |
| Current mortgage balance | $220,000 |
| Maximum new loan at 80% LTV | $320,000 |
| Gross cash available ($320,000 − $220,000) | $100,000 |
| Estimated closing costs (~3% of new loan) | ~$9,600 |
| New loan amount | $320,000 |
| Net cash in hand | ~$90,400 |
Notice two things. First, closing costs (lender fees, title, the appraisal, and more) eat into the cash you actually receive — here, nearly $10,000. Second, your mortgage balance jumps from $220,000 to $320,000, and that whole amount is now re-amortized over a new term. The lower per-month feel of a longer schedule can mask a much larger total interest bill.
A simple test: would you still want this debt attached to your house in 15 years? If not, the cash-out probably isn't the right tool.
Mortgage interest is not automatically deductible just because the loan is a mortgage. Under current IRS rules, interest on the cash-out portion is generally deductible only if the proceeds are used to buy, build, or substantially improve the home that secures the loan — the same standard that disqualifies cash used for debt consolidation, a car, or a vacation. The total deductible mortgage debt is also capped. See IRS Publication 936 for the mortgage interest deduction limits and consult a tax professional about your situation; do not assume a deduction.
If you only need to borrow against equity occasionally or in smaller amounts, you may not need to disturb your existing mortgage at all:
See our comparison of a cash-out refinance versus a HELOC to weigh which structure fits your goal.
The appraisal is pivotal in a cash-out refinance: it sets the home value that the LTV cap is applied to, so a low appraisal directly shrinks the cash you can access. You'll also go through full underwriting — expect to document income (pay stubs, W-2s or tax returns), assets, and credit, much like your original purchase. Finally, most programs impose a seasoning requirement, meaning you must have owned the home (and often held the existing loan) for a minimum period — commonly six to twelve months — before you can cash out. The Consumer Financial Protection Bureau (CFPB) is a reliable, neutral source for understanding these requirements and your borrower protections.
A rate-and-term refinance only changes your rate or term and pays off your old balance dollar-for-dollar — no cash to you. A cash-out refinance gives you a larger loan and hands you the difference in cash. Because of the added risk, cash-out loans usually carry a slightly higher rate.
Enough to stay within the program's LTV cap after taking cash. Conventional and FHA cash-out loans generally require you to leave at least 20% equity (an 80% LTV ceiling). Eligible VA borrowers may be able to access more. The home's appraised value determines exactly how much you can take.
No. Loan proceeds are borrowed money, not income, so the cash itself is not taxed. Separately, the interest may be deductible only if you use the funds to buy, build, or substantially improve the home — see IRS Publication 936 and a tax professional.
It can lower your interest rate sharply, but it converts unsecured debt into debt secured by your home and stretches it over decades. It only makes sense if you address the spending that created the balances and won't run the cards back up. Otherwise you risk your home for a problem you didn't fix.
← Back to the RefiPoint calculator · Compare: Cash-out refinance vs. HELOC →