Cash-Out Refinance Explained
A cash-out refinance replaces your current mortgage with a new, larger loan. You receive the difference between the new loan amount and what you owe in cash—for home improvements, debt consolidation, or other goals.
Unlike a HELOC or home equity loan, which add a second lien on your home, a cash-out refinance pays off your existing first mortgage and gives you one new first mortgage. You get a new rate, a new term, and cash in hand—but you also take on closing costs and reset the clock on your loan. Whether it makes sense depends on how much you need, current rates, and how it compares to a HELOC or home equity loan.
Why It Matters
Tapping home equity can fund renovations, pay off high-interest debt, or cover other major expenses. A cash-out refinance is one way to do it—often with a single, potentially lower rate than a second lien—but it replaces your entire mortgage and usually comes with 2–5% in closing costs. Comparing it to a HELOC or home equity loan helps you choose the right tool.
How a Cash-Out Refinance Works
You apply for a new mortgage larger than your current balance. At closing, the new loan pays off your existing mortgage; the difference (minus closing costs) goes to you in cash. Your new loan has a new interest rate and term—often 15 or 30 years—so your monthly payment and total interest over time change. Lenders typically limit how much you can borrow based on your home’s value and your equity (often up to 80% loan-to-value on the new loan).
Closing costs usually run 2–5% of the loan amount (appraisal, title, origination, etc.). Some lenders offer no-closing-cost options by rolling costs into the loan or charging a slightly higher rate. For more on when refinancing pays off, see when to refinance your mortgage.
When a Cash-Out Refinance Makes Sense
- Current mortgage rates are low and you want to tap a large amount of equity in one shot.
- You have a planned use for the cash—renovations, debt consolidation, or another goal—and the new payment fits your budget.
- You plan to stay in the home long enough that the benefit (e.g. lower blended rate or one simple payment) outweighs closing costs.
It’s less ideal if you only need a smaller amount or want to keep your existing mortgage rate and term. In those cases, a HELOC or home equity loan leaves your first mortgage unchanged and may be simpler.
Cash-Out Refinance vs HELOC vs Home Equity Loan
Cash-out refinance: One new first mortgage; you get cash and a new rate/term. Good when rates are low and you want a large lump sum. Resets your loan clock and has full refinance closing costs.
HELOC: A line of credit secured by your home; you draw as needed and pay interest on the balance. Your first mortgage stays as-is. Good when you need flexibility or aren’t sure of the total amount. Read more in our HELOC guide and compare HELOC rates.
Home equity loan: A lump-sum second mortgage with fixed rate and fixed payments. Your first mortgage stays as-is. Good when you know the amount and want one fixed payment. See our home equity loan guide and compare home equity loan rates.
Costs and Considerations
Expect 2–5% of the loan amount in closing costs (appraisal, title insurance, origination, recording, etc.). The new loan may have a higher balance and a new term, so total interest over time can be higher even if the rate is similar. Run the numbers: compare your new payment and total interest to what you’d pay with a HELOC or home equity loan, and factor in how long you plan to stay in the home.
Interest on the portion of the loan used to buy, build, or substantially improve the home securing the loan may be tax-deductible; consult a tax professional. Using the cash for other purposes (e.g. debt consolidation, education) may have different tax treatment.
Quick Takeaway
A cash-out refinance replaces your current mortgage with a larger one and gives you the difference in cash. It’s one way to tap equity—often with one rate and one payment—but it resets your loan and comes with closing costs. Compare cash-out refinance rates, refinance rates, and HELOC or home equity loan options to see what fits. Ready to apply? Refinance application or home equity application.