# A cash-out refinance replaces your existing mortgage with a new, larger loan and gives you the difference in cash — letting you tap your home equity for things like home improvements, debt consolidation, or major expenses, while leaving you with one new mortgage at a new rate, term, ([learn more about what is private mortgage fund? mortgage lender overview | rateroots](/library/what-is-private-mortgage-fund-mortgage-lender-overview-rateroots)) ([learn more about can i get a mortgage with 600 credit score?](/library/can-i-get-a-mortgage-with-600-credit-score)) ([learn more about can i get a mortgage with 500 credit score?](/library/can-i-get-a-mortgage-with-500-credit-score)) ([learn more about what is lot lending? mortgage lender overview | rateroots](/library/what-is-lot-lending-mortgage-lender-overview-rateroots)) ([learn more about what is archway fund? mortgage lender overview | rateroots](/library/what-is-archway-fund-mortgage-lender-overview-rateroots)) ([learn more about small business grants: complete guide to free funding opportunities](/library/small-business-grants-complete-guide-to-free-funding-opportunities)) and payment.
If you have built up equity in your home, a cash-out refinance is one of the most common ways to turn that equity into usable cash. Here's exactly how it works, what it costs, and when it makes sense.
## How a cash-out refinance works
Say your home is worth $400,000 and you owe $220,000. You have $180,000 in equity. With a cash-out refinance, you might take out a new loan for $300,000, use $220,000 to pay off the old mortgage, and pocket the remaining $80,000 (minus closing costs) in cash. You now have one new mortgage of $300,000.
Most lenders let you borrow up to about 80% of your home's value on a conventional cash-out refinance, so you generally need to keep at least 20% equity in the home. The cash you receive is a loan, not income, so it isn't taxed — but you do pay interest on it as part of your new mortgage.
## Cash-out refinance requirements
Lenders typically look for:
- **Equity:** Enough to borrow against while leaving roughly 20% in the home (loan-to-value of about 80% or less for conventional loans).
- **Credit score:** Often 620 or higher for conventional loans, with the best rates going to higher scores.
- **Debt-to-income ratio:** Generally 43% or lower, though this varies.
- **Income and employment:** Documentation proving you can repay the new, larger loan.
- **An appraisal:** To confirm your home's current market value.
Government-backed options like FHA and VA cash-out refinances have their own rules and may allow higher loan-to-value limits.
## What it costs
A cash-out refinance has closing costs similar to your original mortgage — typically 2% to 5% of the loan amount, covering the appraisal, origination, title, and other fees. Because you're borrowing more, your monthly payment may rise, and you may pay a slightly higher interest rate than a standard rate-and-term refinance.
## Cash-out refinance vs. HELOC vs. home equity loan
| Option | Structure | Best for |
|--------|-----------|----------|
| Cash-out refinance | Replaces your mortgage with a larger one | Tapping a large lump sum, possibly improving your rate |
| Home equity loan | Second loan on top of your mortgage | A fixed lump sum without touching your first mortgage |
| HELOC | Revolving line of credit on your equity | Flexible, ongoing access to funds |
If current rates are near or below your existing mortgage rate, a cash-out refinance can be attractive. If your current rate is much lower than today's rates, a home equity loan or HELOC may let you tap equity without giving up that low first-mortgage rate.
## When a cash-out refinance makes sense
It's often a smart move for value-adding home improvements, consolidating high-interest debt into a lower mortgage rate, or funding a major planned expense. It's riskier when used for everyday spending or depreciating purchases, because you're converting unsecured flexibility into debt secured by your home — if you can't pay, the home is on the line.
## Frequently asked questions
**How much cash can I get from a cash-out refinance?** Typically up to 80% of your home's value minus what you still owe, for a conventional loan. On a $400,000 home where you owe $220,000, that's roughly up to $100,000 before closing costs.
**Do you pay taxes on cash from a refinance?** No. The cash is loan proceeds, not income, so it isn't taxed. Mortgage interest may be deductible if the funds are used to buy, build, or substantially improve the home — confirm with a tax professional.
**Does a cash-out refinance hurt your credit?** There's a small temporary dip from the credit inquiry and the new account, but responsibly managing the new mortgage — and paying off high-interest debt with the cash — can help your credit over time.
A cash-out refinance can be a powerful way to put your home equity to work, but it resets your mortgage and uses your home as collateral. Compare it against a HELOC or home equity loan, run the closing costs and new payment, and make sure the use of funds justifies borrowing against your home.
*This article is for general informational purposes only and is not financial or lending advice. Loan terms, rates, and requirements vary by lender and situation; consult a licensed mortgage professional before making a decision.*
