At a glance
- Lien
- New first mortgage
- Programs
- Conventional, FHA, VA, Non-QM
- Use of funds
- Any purpose
Educational overview, not a loan offer. Requirements vary by lender and borrower.
Overview
A cash-out refinance replaces your current mortgage with a new loan for more than you owe, and pays you the difference at closing.
Homeowners use it for renovations, debt consolidation, education or investment. Conventional, FHA, VA and Non-QM options each have their own limits.
How a cash-out refinance works
A cash-out refinance pays off your current mortgage with a new, larger first mortgage. Once the old loan, any other liens being paid off and the closing costs are covered, the remainder is paid to you after closing. You end up with one loan, one payment and a higher balance than before.
The new loan's rate and term apply to the whole balance, not just the cash you take. That is the key difference from a HELOC or a closed-end second mortgage, which leave your first mortgage untouched. If your current rate is lower than what is available now, a cash-out refinance reprices all of that debt; if it is higher, the comparison can look quite different.
Under Fannie Mae's rules, a new mortgage on a home you own free and clear, or a refinance that pays off a second lien that was not used to buy the home, is also treated as a cash-out refinance.
Who a cash-out refinance can fit
A cash-out refinance tends to fit owners who have built substantial equity and would rather carry one larger loan than add a second payment.
It tends to be a weaker fit when your current rate is well below today's, when you need only a modest amount, or when the cash would pay for spending that will not last as long as the debt.
Situations where it comes up:
- An owner funding a major renovation who also wants to change the first mortgage's rate or term.
- Someone who owns the home outright, or nearly so, and wants to borrow against it.
- A borrower replacing a first mortgage and a HELOC balance with a single loan.
- A veteran who wants to move from a conventional or FHA loan to a VA-backed loan and take some equity out at the same time.
Seasoning, title and program rules
Each program sets its own timing and ownership rules. Under Fannie Mae's guide, at least one borrower must have been on title for six months before the new loan funds, with exceptions for inherited homes, property awarded in a divorce and the delayed financing exception for recent cash purchases. A first mortgage being paid off must be at least 12 months old, except when buying out a co-owner under a legal agreement.
FHA allows cash-out only on a principal residence that at least one borrower has owned and lived in for the 12 months before the case number is assigned, with an exception for some inherited homes, and it requires an on-time mortgage payment record for the past year. VA requires a Certificate of Eligibility, VA and lender credit and income standards, and that you live in the home.
Lenders often add overlays on top of these, so two lenders can answer the same question differently.
Credit and debt-to-income
A cash-out refinance is fully underwritten. The lender reviews your credit history, existing debts and the new payment, and calculates your debt-to-income ratio, which compares monthly debt payments with gross monthly income. Agency guidelines and each lender set the limits for that ratio and the credit scores they accept, and expectations are often stricter for cash-out than for a rate-and-term refinance.
If part of the cash pays off credit cards or other loans at closing, those payments generally drop out of the new ratio. That can help the numbers, but it also moves unsecured debt onto your home, so the CFPB suggests weighing alternatives with a credit counselor before borrowing against a home to pay off debts.
See also
Equity, loan-to-value and mortgage insurance
How much cash you can take depends on the appraised value, the maximum loan-to-value ratio for the program, what you owe now and the closing costs. Conventional and FHA cash-out maximums are lower than their purchase and rate-and-term maximums, and conventional maximums also vary by occupancy and number of units, so a second home or rental supports less borrowing than a primary residence. VA sets its own ceiling, and many lenders apply a lower one.
Mortgage insurance works differently by program. Fannie Mae's cash-out maximums sit at or below the level where conventional mortgage insurance would be required, so conventional cash-out loans generally do not carry it. FHA cash-out loans carry FHA's mortgage insurance premiums, and VA cash-out loans carry the VA funding fee unless you are exempt.
Your loan officer can show the maximum for your property and estimate the cash that would remain after costs.
Income documents for a cash-out refinance
Expect full documentation: pay stubs and W-2s or tax returns, statements for any assets, your current mortgage statement and homeowners insurance details. The lender verifies that the payment on the larger loan fits your income.
Program details matter. FHA does not allow income from a non-occupant co-borrower to qualify for a cash-out refinance, and it does not count rent from an accessory dwelling unit for that purpose. Self-employed borrowers whose tax returns understate cash flow sometimes look at non-QM cash-out options that document income with bank statements, and investors may consider a DSCR cash-out refinance, which looks mainly at the property's rent. Those loans follow lender rules rather than agency rules and are priced differently.
Cash-out on primary homes, second homes and rentals
Conventional cash-out refinances can be used on one- to four-unit primary residences, second homes and investment properties, with the tightest limits on rentals. FHA and VA cash-out refinances are available only for a home you live in as your principal residence.
If the home has been listed for sale, Fannie Mae requires the listing to be taken down on or before the date the new loan funds. Condos may need a project review, manufactured homes face added requirements, and FHA requires a manufactured home to have been permanently installed on its site for more than a year before a cash-out refinance.
What a cash-out refinance can accomplish
Compared with adding a second mortgage, a cash-out refinance has some structural advantages, though whether it is the better choice depends on the rates and costs involved.
- One loan and one payment instead of a first mortgage plus a second lien.
- A chance to change the rate type or term on the whole balance at the same time.
- Proceeds can be used for any purpose under Fannie Mae's rules, including paying off debts at closing.
- A first-lien loan, which lenders often price differently from a second lien.
- FHA and VA versions for eligible owner-occupants, including moving a non-VA loan into a VA-backed loan.
See also
Cost adjustments, tax rules and less remaining equity
The biggest tradeoff is that the new rate applies to everything you owe. Giving up a low rate on a large existing balance to borrow a smaller amount can raise your total cost even if the new payment looks manageable. Closing costs are similar to a purchase loan's and are often paid from the proceeds, which reduces your equity further.
A larger first mortgage also restarts the payoff clock. If the new term is longer than the time left on your current loan, you may pay interest for more years. And because the home secures the new loan, debts that were unsecured become debts that can put the house at risk if payments slip.
Also keep in mind:
- Agency pricing adjustments often apply to cash-out loans.
- IRS Publication 936 explains that interest on the portion of a home loan not spent to buy, build or substantially improve the home is generally not deductible as home mortgage interest; ask a tax professional.
- Less equity remains for a future sale, move or emergency.
Talk it through with Ruben
Compared with other ways to borrow against equity
Each option uses the same equity in a different way. A cash-out refinance replaces the first mortgage, a HELOC and a closed-end second sit behind it, and a rate-and-term refinance changes the loan without new borrowing. The table compares features, not costs, which depend on your rates, balance and the lender.
If you need only part of your equity, or your current first-mortgage rate is lower than what is available now, the second-lien options are worth pricing alongside a cash-out refinance.
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| Feature | Cash-out refinance | HELOC | Closed-end second | Rate-and-term refinance |
|---|---|---|---|---|
| Current first mortgage | Paid off and replaced | Stays in place | Stays in place | Paid off and replaced |
| How you receive money | Lump sum after closing | Draw as needed | Lump sum after closing | Little or none |
| Rate applies to | Entire new balance | Amount drawn | Second loan only | Entire new balance |
| Rate type | Fixed or adjustable | Usually variable | Usually fixed | Fixed or adjustable |
| FHA or VA version | Yes, owner-occupied only | No | No | Yes, by program |
Cash-out scenarios: debt payoff, a paid-off home, a VA switch
These illustrations show the kind of reasoning involved. They are not recommendations.
- An owner with a high-rate first mortgage and a HELOC balance from a kitchen remodel combines both into one new loan, after comparing the total cost with keeping them separate.
- A retiree who owns a home free and clear considers a cash-out refinance to fund a new roof and accessibility changes, and also asks about a HELOC and a reverse mortgage before choosing.
- A veteran with an FHA loan uses a VA cash-out refinance to move into a VA-backed loan and pay off a car loan, after checking the funding fee and whether an exemption applies.
- A homeowner with a very low first-mortgage rate who needs a modest sum for tuition decides to price a closed-end second instead.
Appraisal, title and funding timeline
Timelines depend on the appraisal, title and how quickly conditions are cleared, so avoid committing the cash before the loan closes and any cancellation period passes.
- Gather your current mortgage statement, payoff details for any other liens, income documents and insurance information.
- Apply and review the Loan Estimate, which lenders must send within three business days. It shows the loan amount, closing costs and estimated cash to you.
- The lender orders an appraisal in most cases, plus title work. Fannie Mae's system offers value acceptance on some cash-out loans, which the lender may use.
- Underwriting reviews income, credit, seasoning and occupancy; expect questions about recent deposits and new debts.
- You receive the Closing Disclosure at least three business days before closing.
- On a principal residence, you have three business days after closing to cancel, and the lender holds the funds until that period ends.
Cash-out myths about costs, available equity and rentals
These beliefs come up often when owners first look at tapping their equity.
- Myth: The cash is the only new cost. Reality: The new rate applies to the entire balance, and closing costs come out of your equity.
- Myth: All my equity is available. Reality: Most programs cap the loan-to-value ratio below the home's full value, and many lenders set lower caps of their own, so some equity usually stays in the home.
- Myth: A rental works the same way as my home. Reality: Rentals and second homes face lower maximums, and FHA and VA cash-out loans are not available on them.
- Myth: Paying off cards with home equity erases the debt. Reality: It moves the debt onto your home, often for a longer period.
- Myth: Cash-out loans are approved on equity alone. Reality: Income, credit and debt-to-income still have to support the larger payment.
Common questions
13 questions
Cash-out refinance or HELOC?
A cash-out refinance replaces your whole first mortgage, so it may fit if your current rate is higher than what's available now or you want a single loan. A HELOC or home equity loan leaves your first mortgage in place; a HELOC usually has a variable rate and lets you draw only what you need. Compare the closing costs and the total cost of each over the time you expect to keep it.
How long do I have to own my home before a cash-out refinance?
Under Fannie Mae's rules for a conventional cash-out refinance, at least one borrower must have been on title for six months, with exceptions such as an inherited home or a property awarded in a divorce, and any first mortgage being paid off must be at least 12 months old, except when buying out a co-owner under a legal agreement. An FHA cash-out refinance requires that at least one borrower has owned and lived in the home as a primary residence for the past 12 months, with an exception for some inherited homes. VA and other programs have their own rules.
Can I do a cash-out refinance on a second home or rental property?
Conventional rules allow it. Freddie Mac's cash-out refinance covers one- to four-unit primary residences, second homes and one- to four-unit investment properties, with requirements that vary by property type. FHA and VA cash-out refinances are only for a home you live in.
I bought my home with cash. Can I take cash out right away?
Possibly. Fannie Mae's delayed financing exception allows a cash-out refinance within six months of an arm's-length cash purchase if no mortgage was used to buy the home. The new loan can't be more than what you documented putting into the purchase plus the new loan's closing costs, and money you received as a gift for the purchase can't be paid back from it.
Can I use a cash-out refinance to pay off other debts?
Fannie Mae's rules allow it: cash-out proceeds can be used for any purpose, including paying off credit cards or other loans, and a student loan cash-out option pays student loans directly at closing. Paying off unsecured debt this way moves it onto your home, so compare the total cost over time, and consider talking with a nonprofit credit counselor first, as the CFPB suggests.
Can I take cash out of a home I own free and clear?
Many programs allow it. Fannie Mae treats a new first mortgage on a home with no existing lien as a cash-out refinance, and FHA also allows a home owned free and clear to be refinanced as cash-out when its occupancy rules are met. The usual seasoning and equity limits apply. If you bought the home with cash within the past six months, Fannie Mae's delayed financing exception has its own rules.
Can I do a cash-out refinance while my home is listed for sale?
Not while it stays listed. Fannie Mae requires a home that was listed for sale to be taken off the market on or before the date the new loan funds, and many lenders ask why it was listed and whether you still intend to live there. If you plan to sell soon, the costs of a new loan may not be recovered before the sale, so compare other ways to cover your needs.
Can I use a VA cash-out refinance to replace a conventional or FHA loan?
VA allows it. VA explains that its cash-out refinance can be used to take equity out or to refinance a non-VA loan into a VA-backed loan. You need a Certificate of Eligibility, you must meet VA's and the lender's credit and income standards, and you must live in the home. The lender orders an appraisal, and a VA funding fee applies unless you are exempt.
How much cash can I get from a cash-out refinance?
It depends on four things: the appraised value, the maximum loan-to-value ratio for your program and property type, what you owe now, and the closing costs paid from the new loan. Each program and lender sets its own maximum, and the caps are lower for second homes and rentals. Your loan officer can estimate the cash after costs once the value is known, but the appraisal and underwriting make the final determination.
Does FHA check my mortgage payment history for a cash-out refinance?
Yes. FHA requires the lender to document that you made every mortgage payment within the month it was due for the past 12 months, or since you got the loan if that is shorter, and that the payment for the month before closing was also made on time. If you were in a forbearance plan, FHA has added requirements, including a run of on-time payments after the plan ended.
Can a family member who will not live in the home help me qualify for a cash-out refinance?
Not with FHA: its rules say income from a non-occupant co-borrower cannot be used to qualify for a cash-out refinance. Conventional and non-QM programs have their own rules for non-occupant co-borrowers, and some lenders limit them on cash-out loans. Anyone who signs the note becomes responsible for the full debt, so talk it through carefully before you apply together.
Can I take cash out of a home I inherited?
Agency timing rules are more flexible for inherited homes. Fannie Mae waives its six-month title requirement when the lender documents that you acquired the home through an inheritance. FHA lets an heir who lives in the home as a principal residence apply without the usual 12 months of occupancy, as long as the home was never treated as an investment property after the inheritance; if it was rented out, the 12-month occupancy rule applies.
Can I cancel a cash-out refinance after I sign?
On your principal residence, generally yes. You can cancel in writing until midnight of the third business day after closing, or later if the required notice or disclosures were delivered late, and no funds are released until that window closes. If you refinance with the lender that already holds your loan, the right covers only the new money above your existing balance and refinancing costs. It does not apply to second homes or rentals.
This page explains how this type of loan generally works. Programs, guidelines and availability vary by lender and change often. Contact Ruben to see which options are available for your scenario today.