What is a cash-out refinance?

A cash-out refinance replaces your existing mortgage with a larger loan and gives you the difference in cash, letting you tap your home's equity. The new loan balance is higher than what you owed before, and you repay it over the new loan term.

A cash-out refinance lets you convert home equity into cash by replacing your existing mortgage with a larger one. If you owe $200,000 on a home worth $350,000, you could refinance into a $270,000 loan, pay off the original mortgage, and walk away with roughly $70,000 in cash (minus closing costs). The equity you had becomes a larger loan balance — you're effectively borrowing against your home. The CFPB explains cash-out refinancing as a way to access equity while potentially adjusting your rate and term.

How much can you cash out?

Most lenders cap cash-out refinances at 80% of the home's appraised value — a figure called the maximum loan-to-value (LTV) ratio. Using the example above: $350,000 × 80% = $280,000 maximum new loan. Subtract the $200,000 payoff and you'd have up to $80,000 available before closing costs. VA loans are a notable exception — the VA cash-out program can go higher for eligible veterans.

Common uses of cash-out proceeds

Home improvements or renovations that increase the property's value.
Paying off high-interest debt (credit cards, personal loans) — though this converts unsecured debt to secured debt backed by your home.
Funding a major expense such as college tuition or medical bills.
Purchasing a second property or investment when a down payment is needed.

Key costs and risks

A cash-out refinance carries all the standard refinancing costs (2–5% of the new loan amount in closing fees) plus often a higher interest rate than a rate-and-term refinance — lenders price in the added risk of a larger balance. More importantly, your home is the collateral: if you can't make the new, larger payment, foreclosure is the lender's remedy. Tapping equity for depreciating assets or to pay off revolving debt you may run up again is widely viewed by financial educators as a high-risk use.

Cash-out refinance vs. HELOC

Both let you access home equity. A cash-out refinance gives you a lump sum and replaces your first mortgage. A HELOC is a revolving credit line that sits alongside your existing mortgage. HELOCs typically have variable rates and interest-only draw periods. Cash-out refinances can lock in a fixed rate for the entire balance. If you need a large sum at once and prefer payment certainty, cash-out may be simpler; if you want flexibility to draw over time, a HELOC is often the better structure.

What the regulators say

A cash-out refinance replaces your existing mortgage with a new, larger loan. You receive the difference between the new loan amount and what you owed as cash at closing. — CFPB
Because your home secures the loan, failure to repay a cash-out refinance can result in foreclosure. — CFPB
The CFPB advises borrowers to compare the total cost of a cash-out refinance — including closing costs and the interest paid over the new loan term — before proceeding. — CFPB

Key takeaways

A cash-out refinance borrows more than you owe and gives you the difference in cash — your new loan balance is larger.
Most lenders cap borrowing at 80% of your home's appraised value (LTV limit).
Closing costs apply as with any refinance — typically 2–5% of the new loan amount.
Your home is collateral: missed payments risk foreclosure, not just credit damage.
Compare total interest cost over the new loan term vs. alternatives like a HELOC before deciding.