Cash-out refinance: When it builds equity and when it risks your home

A cash-out refinance replaces your current mortgage with a larger one and hands you the difference in cash. Do it right, and it’s one of the cheaper ways to borrow against money you already own. Do it wrong and you’ve turned a weekend of spending into 30 years of debt secured by your house.

Beyond rate shopping, know the trade-offs going in: a cash-out refinance usually means a higher rate than your current loan, a reset of the loan clock and a smaller equity cushion if home values drop.

What is a cash-out refinance?

A cash-out refinance works like a standard refinance with one key difference: your new loan is larger than your remaining balance, and you receive that difference as a lump-sum cash payment funded by your home’s equity.

You can use the money for almost anything — home remodeling, debt consolidation, college tuition. But unlike a personal loan or credit card, a cash-out refinance is secured debt. If you default, the lender can foreclose on your home. Never borrow more than your budget can comfortably absorb at your new payment, even if you qualify for more, and watch your loan term: extending it means paying more in interest over time.

How does a cash-out refinance work?

A cash-out refi is similar to a regular refi (also called a “rate-and-term” refi). You’ll replace your existing mortgage with a new one at a new rate, and sometimes a new term length. The difference is that your new loan is for a larger amount, rather than just the remaining balance of your original loan. That larger amount includes cash withdrawn from your home’s equity.

In other words, when you use a cash-out refinance, you exchange some of your home’s equity for cash. This reduces the equity you have in your home and adds to your overall mortgage debt.

Cash-out refi example

Let’s say you still owe $100,000 on your home, and it’s currently worth $400,000. That means you have $300,000 in equity. For a cash-out refinance, your loan amount is typically limited to 80% of the home’s value — meaning you must leave at least 20% of your home’s value untouched. So in this example, you’d need to keep $80,000 of your equity intact and could withdraw up to $220,000 in cash.

If you want to withdraw the maximum amount, you’d take out a new mortgage for $320,000. The new loan would pay off your current mortgage, and you’d begin repayment of your larger loan at a new interest rate and, potentially, a different term.

Cash-out refinance requirements

Just as you would with any mortgage, you’ll need to meet qualifying criteria for a cash-out refinance. For a conventional loan, these requirements include:

• Credit score: You’ll generally need a credit score of at least 620 to qualify. But a higher score will get you a more competitive interest rate.
• Debt-to-income (DTI) ratio: Your DTI measures your monthly debt payments, including the refinanced mortgage payment, against your gross monthly income. Lenders often cap this at 43%.
• Equity: Most lenders require you to maintain 20% equity in your home after the cash-out. That means you’ll need more than 20% equity going in to have anything left to withdraw.
• Seasoning: Conventional cash-out refis typically require a six-month seasoning period, meaning you must have owned the home for at least six months before you qualify for refinancing.

Cash-out refinance fees

The closing costs on a cash-out refinance run lower than what you paid to buy your home, but they’re still real money. Expect total closing costs of 2% to 5% of your loan amount — on a $300,000 loan, that’s $6,000 to $15,000. Within that total, lenders typically charge $300 to $700 for the appraisal and an origination fee of 0.5% to 1% of the loan amount.

Most lenders let you roll these costs into the new loan instead of paying out of pocket. While that may be convenient, it means you’ll pay interest on your own closing costs for the life of the loan.

How to get a cash-out refinance

Here are the basic steps to secure a cash-out refi:

1. Determine how much you can withdraw. Multiply your current home value by 0.80, then subtract your current mortgage balance. The result is roughly the amount you may be able to cash out.
2. Figure out your goals. Clarify how you’d like to use the funds from your cash-out refinance. Clarify how you’d like to use the funds from your cash-out refinance, then run the numbers in Bankrate’s refinance calculator to see what the new payment actually looks like before you commit.
3. Shop around for the best terms. Each lender sets its own qualifying criteria, closing costs and fees. Comparing rates and terms from at least three lenders can help you get the best deal available. Bankrate’s Hidden Homeownership Tax research found that 78.7% of refinance borrowers in 2025 paid above the most competitive rate for their profile — you can close that gap by shopping around.
4. Apply for the loan. Once you’ve chosen a lender, apply and go through its underwriting process. Be ready to provide proof of income, like financial statements and tax returns. Your home will also need a professional appraisal so the lender can calculate how much equity you have.
5. Close on the loan. After closing, you’ll receive the lump sum of cash from your new lender.

Current cash-out refinance rates

Check current rates on cash-out mortgage refinances and compare lenders with Bankrate.

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

With a conventional cash-out refinance, the most common kind, you can typically borrow up to 80% of your home’s value. That threshold varies by property type — with a multifamily home, for example, you can often only borrow up to 75%.

An FHA cash-out refinance also allows you to borrow up to 80% of the value of your home. A VA loan cash-out refinance can let you borrow up to 100% of your home’s value, more than any other loan type. That flexibility comes with real risk: it leaves no equity cushion if home values drop, which can leave you owing more than your home is worth.

How to think about what you’ll do with the cash

You can use the money from a cash-out refinance for almost any purpose — a lender won’t stop you. The difference between a good use and a bad one comes down to one question: Does the value outlast the debt?

If the money builds equity, eliminates a debt for good or produces income, it’s still working for you decades from now, while you’re still paying it off. If it’s spent and gone within a year, you’re repaying it for the next 30 years on an asset that no longer reflects the cost. Run every use through that test before you commit.

• Major home improvement projects: Remodeling a kitchen or adding square footage can directly increase your home’s resale value — the cash you borrow stays invested in the asset that’s securing it.
• High-interest debt consolidation: Refinance rates run well below credit card rates, so rolling high-interest balances into your mortgage can lower your total monthly debt payment. This only works if the spending pattern that created the debt is over.
• College tuition: Tapping home equity to pay for college can make sense if the refinance rate is lower than the student loan rate.
• Investments: Some people use a cash-out refinance to purchase an investment property or start a business. In these cases, you’re tapping into your home equity to fund an income-producing asset.

This type of refinancing is one of the cheaper ways to pay for large expenses, in part because the collateral involved — your home — translates to lower risk for lenders. But remember that the risk to you can be substantial, because your home is on the line.

Uses worth thinking twice about

• Vacations, cars or other discretionary spending: A lender will approve this use. The math still doesn’t work in your favor: you’re converting something that loses value the moment you buy it into 30 years of debt secured by your house. You’re trading 30 years of debt for a week you won’t remember the cost of. The math doesn’t work in your favor. 
• Tapping equity within 10 years of retirement: Depleting your home equity increases your fixed monthly expenses — in the form of a higher mortgage payment — at a time when it’s best to minimize them.
• Debt consolidation when spending behavior hasn’t changed: Unless you modify your spending behavior, you’re simply moving the problem from an unsecured creditor to your mortgage servicer — with foreclosure as your new worst-case scenario.

Pros and cons of cash-out refinancing

Pros

• Qualify for better terms: If market rates have decreased or your finances have improved since you first took out your mortgage, a cash-out refinance could result in lower rates. (But be careful: most homeowners locked in a rate below 5% and won’t beat it today.)
• Lower your borrowing costs: Cash-out refinances often have lower rates than home equity loans, personal loans and credit cards.
• Improve your credit: If you use your equity to consolidate debt, your credit utilization ratio — the amount of your outstanding balances compared to your overall credit limits — could drop. This can help boost your credit score.
• Take advantage of tax deductions: If you use the cashed-out funds for home improvements and itemize your taxes, you could deduct the interest. Most filers take the standard deduction, so confirm this applies to you before counting on it.

Cons

• Risk higher interest rates: If interest rates have risen since your original mortgage, you’ll pay more on the new loan even with a credit score of 740 or higher. Since the new mortgage is larger, that higher rate applies to more debt.
• Prolong repayments: If you’re consolidating debt, compare the total interest you’d pay over a 30-year refinance against paying it off faster through a home equity loan or HELOC. A lower monthly payment isn’t the same as a lower total cost.
• Reset the clock on your mortgage: Even a slightly lower rate can be outweighed by another decade of interest. Always calculate the total interest over the life of the new loan, not just the monthly payment.
• Increase the risk of losing your home: A cash-out refinance increases your mortgage balance. Failing to repay the loan means you could lose your home to foreclosure. Don’t take out more cash than you need, and make sure it’s going toward something that improves your long-term finances.

Before you sign: Questions to ask yourself

What will the cash be used for?

If you’re funding a renovation that adds resale value or paying off high-interest debt for good, a cash-out refinance can make financial sense. If you’re covering a vacation, a car or other discretionary spending, you’re trading long-term home equity for short-term spending, and the math rarely works in your favor.

What are the total closing costs, and when is my break-even point?

Closing costs on a cash-out refinance typically run 2% to 5% of your loan amount, or $6,000 to $15,000 on a $300,000 loan. Divide your total closing costs by your monthly savings to find your break-even point. If you plan to move before you reach it, the refinance will have cost you money instead of saving it.

Will the new monthly payment impact my retirement budget?

You’ll be replacing your current loan with a larger one, and you’ll likely have higher monthly payments that may still be in place when you retire. If this is the case, calculate whether your fixed income in retirement can comfortably cover the higher monthly mortgage payment.

Do I have enough equity for a cash-out refinance?

If you’ll have at least 20% equity left in your home after the cash-out, you’ll meet most conventional lender requirements. If you’re close to that 20% line, the rate premium lenders charge for high LTV cash-out loans may erase whatever you’d gain from cashing out at all.

When a HELOC or home equity loan is the better choice

If your current mortgage rate is below 6%, a cash-out refinance forces you to trade that rate for today’s market rate on your entire loan balance, not just the amount you’re withdrawing. In that case, a HELOC or home equity loan is usually the better tool: both let you borrow against your equity while leaving your existing mortgage and its rate untouched.

Current home equity loan rates

Bankrate's home equity loan lenders can help you borrow against your home's value without refinancing your primary mortgage.

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A HELOC works like a revolving line of credit with a variable rate tied to the prime rate. A home equity loan is a second mortgage: a fixed-rate lump sum you start repaying immediately.

“Unless you can lower your interest rate or shorten your loan term, it may be more practical to consider a home equity loan or line of credit for smaller or more specific borrowing needs,” says Stephen Kates, former financial analyst for Bankrate.

Frequently asked questions

• How will my monthly mortgage payment change after refinancing?

  Your payment will likely go up if you’re pulling out cash and keeping the same loan term, since you’re borrowing more. It could stay about the same if you’re also dropping to a meaningfully lower rate. Shortening your term — from 30 years to 15, for example — will raise it regardless.

• Does cash-out refinancing hurt your credit?

  Yes, it can. A cash-out refinance increases what you owe, which raises your credit utilization ratio — the share of your available credit you’re using, and one of the biggest factors in your credit score. Opening a new loan also shortens your average account age, which can further lower your score. If you’re withdrawing funds for a sound financial use and don’t have any other borrowing needs on the horizon, the tradeoff may be worth it.