Explain it like I’m 5
When you pay off part of your house, the part that’s truly yours is called equity. If your house is worth $500,000 and you still owe the bank $250,000, you have $250,000 of equity.
A cash-out refinance lets you turn some of that equity into cash. You get a brand-new, bigger mortgage. It pays off your old one, and the extra money comes to you. If you borrow $310,000 to pay off the $250,000, you get about $60,000 (minus some fees).
The catch: you now owe more, often for longer, maybe at a different interest rate — so your monthly payment and total interest can go up. And because the loan is tied to your house, you must be able to keep paying it.
Words you’ll see, in plain English
- Cash-out refinance
- Swapping your mortgage for a bigger new one and taking the difference as cash. You turn some of your home equity into money, but you owe more.
- Home equity
- The part of your home you truly own: what it’s worth minus what you still owe. A $400,000 home with a $250,000 mortgage has $150,000 of equity.
- Loan-to-value (LTV)
- How big your loan is compared with your home’s value. Owe $300,000 on a $400,000 home and your LTV is 75%. Lenders use it to decide how much you can borrow.
- Closing costs
- The fees you pay to get a mortgage or refinance — appraisal, lender fees, title insurance and more. Often 2% to 5% of the loan.
- Refinance
- Replacing your loan with a brand-new one, usually to get a lower rate or a different length. It involves a new application and closing costs.
- Mortgage
- A loan to buy a home. You pay it back a little every month for many years, and the home is the bank’s guarantee that you will.
More money words explained simply in our glossary.
How to use the cash-out refinance calculator
- Enter your home’s value and what you owe. Your balance is on your mortgage statement; for the value, use a recent estimate.
- Enter your current rate and years left so the calculator can compare against keeping your loan.
- Enter the cash you want and the new loan’s rate and length.
- Set the closing costs and whether you’ll pay them from the cash or add them to the loan.
The math, step by step
Maximum new loan = home value × max loan-to-value (often 80%)
Maximum cash = maximum new loan − what you owe
New loan = what you owe + cash out (+ closing costs, if added to the loan)
Example: a $500,000 home with $250,000 owed at 4% (25 years left), taking $60,000 cash at 6.5% for 30 years, 3% closing costs paid from the cash.
- Most you can borrow: $500,000 × 80% = $400,000, so up to $150,000 cash.
- New loan: $250,000 + $60,000 = $310,000 — 62% of the home’s value.
- Closing costs: 3% × $310,000 = $9,300, so you receive $50,700.
- Payment goes from $1,319.59 to $1,959.41 a month — mostly because the rate went from 4% to 6.5%, not because of the extra $60,000.
Maximum cash-out at 80% loan-to-value
If you owe half your home’s value:
| Home value | You owe | Max new loan (80%) | Max cash (before costs) |
|---|---|---|---|
| $300,000 | $150,000 | $240,000 | $90,000 |
| $400,000 | $200,000 | $320,000 | $120,000 |
| $500,000 | $250,000 | $400,000 | $150,000 |
| $750,000 | $375,000 | $600,000 | $225,000 |
Good and bad reasons to cash out
- Often sensible: paying off credit cards at 20%+ interest (if you won’t run them up again), home improvements that add value, or when the new rate is lower than your current one anyway.
- Think twice: giving up a very low rate, paying for holidays or cars with 30-year debt, or taking equity out right before you plan to sell.
- Compare alternatives: a home equity loan or HELOC keeps your current mortgage and rate, and may cost less if you only need a smaller amount.
Common mistakes
- Looking only at the monthly payment. Restarting a 30-year loan can lower the payment while adding years of interest.
- Forgetting closing costs. On a $300,000 loan, 3% is $9,000.
- Overestimating your home’s value. The lender’s appraisal decides how much you can borrow.
Learn more
- Cash-Out Refinance: How It Works — A cash-out refinance replaces your mortgage with a bigger one and hands you the difference in cash. It can be a cheap way to borrow — or an expensive one if it means giving up a low rate. Here’s how to tell.
Frequently asked questions
How much cash can I get from a cash-out refinance?
Most conventional lenders let your new loan be up to 80% of your home’s value. Multiply your home value by 0.8 and subtract what you owe: a $500,000 home with $250,000 owed allows a new loan of up to $400,000, so up to $150,000 in cash before closing costs. VA loans can allow more; FHA cash-out loans also allow up to 80%.
How much does a cash-out refinance cost?
Closing costs are usually about 2% to 5% of the new loan — for a $310,000 loan that’s roughly $6,200 to $15,500. You can usually pay them in cash, have them taken out of the cash you receive, or add them to the loan.
Is a cash-out refinance a good idea?
It can be if the new rate is close to or lower than your current one and you’re using the money for something that improves your finances — like paying off high-interest debt or a home improvement that adds value. It’s riskier when it means giving up a much lower rate, or when the money goes to everyday spending, because your home secures the loan.
Cash-out refinance vs. HELOC: which is better?
A cash-out refinance replaces your whole mortgage with a bigger one, usually at a fixed rate. A HELOC (home equity line of credit) is a second loan you borrow from as needed, usually at a variable rate, and leaves your first mortgage untouched. If your current mortgage rate is low, a HELOC or home equity loan often costs less overall.
Is the cash from a cash-out refinance taxable?
No. It’s a loan, not income, so you don’t pay income tax on it. Mortgage interest on the part of the loan used to buy, build or substantially improve your home may be deductible if you itemize; interest on cash used for other things generally isn’t.
How long does a cash-out refinance take?
Often around 30 to 45 days from application to closing, including an appraisal. For a primary home, federal rules give you three business days after closing to cancel before the money is released.
These results are estimates for education only, based on the assumptions you enter. They are not financial, investment or tax advice. Real returns, rates and taxes vary. See our methodology anddisclaimer.