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.
By Bogdan · Updated
Your home equity is what your home is worth minus what you owe on it. A cash-out refinance turns part of that equity into cash: you take a new, larger mortgage, pay off the old one, and keep the difference.
Explain it like I’m 5
Imagine your piggy bank is a house. Part of it belongs to the bank (what you still owe) and part belongs to you (your equity).
A cash-out refinance is like asking the bank: “Please lend me more, so I can take some of my part out now.” You get coins today — but you owe the bank more, and you’ll pay it back with interest for many years.
Work out how much you can take out, your new payment and the true cost with the cash-out refinance calculator.
Worked example
- Home worth $500,000; you owe $250,000 at 3.5% with 25 years left (payment about $1,252).
- You take $75,000 cash with a new 30-year loan of $325,000 at 7%.
- Closing costs of 3% ≈ $9,750, so you net about $65,250.
- New loan-to-value: $325,000 ÷ $500,000 = 65% — under the usual 80% limit.
- New payment: about $2,162 a month — $910 more than before.
That’s the hidden cost: the $250,000 you already owed is now charged 7% instead of 3.5%. Borrowing $75,000 alone over 10 years at 8.5% (for example with a home equity loan) would cost about $930 a month, and leave your 3.5% mortgage untouched.
When it can make sense
- Rates have fallen below your current mortgage rate — you lower the rate and get cash.
- Home improvements that add value.
- Paying off much higher-interest debt — but only if you won’t run the cards up again.
When to be careful
- You’d give up a low rate on a large balance.
- You’re resetting a 30-year clock on a loan you’d nearly paid off.
- The cash is for spending — holidays, cars — that won’t outlast the loan.
- Your home is now collateral for that debt: missing payments puts the house at risk.
Cash-out refi vs. HELOC vs. home equity loan
| Cash-out refinance | HELOC | Home equity loan | |
|---|---|---|---|
| Replaces your mortgage? | Yes | No | No |
| How you get money | Lump sum | Draw as needed | Lump sum |
| Rate | Usually fixed | Usually variable | Usually fixed |
| Closing costs | Higher | Low or none | Low to moderate |
| Best when | Rates fell | Ongoing or uncertain costs | One known cost, keep low mortgage rate |
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. Take 80% of the value and subtract what you owe: on a $500,000 home with $250,000 owed, that’s $400,000 − $250,000 = up to $150,000, before closing costs.
What does a cash-out refinance cost?
Closing costs are commonly around 2% to 5% of the new loan. Cash-out loans also often carry a slightly higher rate than a regular refinance. And if your current rate is lower than today’s, you lose it on the whole balance, not just the cash you take out.
Is a cash-out refinance or a HELOC better?
If today’s rates are lower than your current mortgage rate, a cash-out refinance can lower your rate and give you cash at once. If you have a low rate you want to keep, a HELOC or home equity loan borrows only the extra amount and leaves your mortgage alone.
Is cash from a refinance taxable?
No — it’s a loan, not income. Interest on the cash portion is generally only tax-deductible if you itemize and use the money to buy, build or substantially improve the home.
How long does a cash-out refinance take?
Often about 30 to 45 days, including an appraisal, income and credit checks, and closing. You typically receive the cash a few days after closing.
This article is for general education and is not financial, investment or tax advice. Rates, rules and limits change; check current terms with your bank or the IRS. See our disclaimer.